The Lifetime ISA announced in Wednesday’s UK Budget introduces a rival savings vehicle to the traditional pension fund. Jonathan Williams argues that the brand recognition of the Lifetime ISA risks undermining the success of auto-enrolment
For months, the UK pensions industry has been preparing for chancellor of the Exchequer George Osborne to overhaul pension taxation, switching from a system whereby savings are taxed upon drawdown (EET) to one where you get taxed when paying in (TEE).
While Wednesday’s Budget did not see these changes materialise, the proposal for a Lifetime ISA potentially heralds the beginning of a much more dangerous trend – one that continues to place the onus on the individual to act, while undermining a decade-long consensus about the need for ‘inertia’ to get people saving into pensions.
The success of auto-enrolment is beyond doubt. As the Pensions Regulator (TPR) and the Office for National Statistics show with the release of each new batch of data on pension saving, millions of workers are now putting aside money for retirement. The numbers show 6m new savers compared with 2012, according to TPR’s most recent report.
The government has been vocally backing the reforms, first with their terrible (and terribly catchy) workplace pension rap, and more recently through a campaign that regularly sees a 2-metre tall furry purple monster called Workie smiling down from the side of a bus, or lumbering around inner-city parks, reminding people to save into an occupational pension.
So most people would have assumed, based on the evidence, that the government supported auto-enrolment, and the associated pension providers, as the best means as saving for retirement. So why does the chancellor seem intent on questioning their role, and, in effect, stabbing Workie in the back?
The end of the Turner consensus
The answer is an ideological one. The political consensus carefully built from 2004 onwards by the Turner Commission, which recommended auto-enrolment as a way of forcing the hand of uninformed consumers, has been crumbling since its 10th anniversary.
The 2014 Budget saw the revolutionary pension freedoms introduced, supposedly without the prior knowledge of the then-pensions minister Steve Webb, whose own proposals for collective DC akin to the Dutch system were crippled by a member’s ability to draw down pensions savings from 55 onwards.
The ability to draw down money as members wished, without needing to buy an annuity, placed the emphasis on an informed and educated individual to act, and to navigate the complex world of finance associated with it by finding a drawdown product. As David Blake, an academic at the Pensions Institute recently noted, the changes effectively saw members brought into an institutional system through inertia, only to be thrown back into the retail market when they had to make decisions that would impact their finances for the rest of their lives.
This focus on the individual operating within the retail market is set to continue with the introduction of the Lifetime ISA. While the ISA product and auto-enrolment both survive what Keith Ambachtsheer, the Canadian pension academic, calls the ‘Elevator Test’, once it comes to the drawdown phase, it is less likely you can explain to a pension saver during the trip to the 6th floor how to access a drawdown product. With an ISA, you simply take the money.
The ISA also has the advantage of brand recognition and, in the Lifetime ISA, the selling point that you can use the savings – and the 25% top-up – to finance your first home. Pension savings, in the meantime, remain locked away for the future. Which product would, therefore, be more attractive to a cash-strapped saver under 40, even if by using an ISA she misses out on the 3% employers pay in as part of auto-enrolment?
The answer may seem obvious to someone who understands the benefit of getting ‘free money’ from the employer, but the lure of the 25% bonus might win over many who do not understand that the minimum 3% contribution under auto-enrolment is actually a better deal than the ISA top-up, and that you get more by contributing less.
The real question, in this new world with a focus on individuals, is whether Osborne will see reforms through to their logical end and allow savers to dictate into which provider an employer has to place contributions. The approach, already in place in Australia to some extent, might trigger an advertising war between providers, but it would also unleash the free market on providers failing to offer value for money, or those investing in a way that’s not aligned with members.
If the Conservative government really wants to put the onus on the individual, it must give savers full control and let choice drive consolidation, either towards the National Employment Savings Trusts, Now: Pensions and People’s Pensions in the market, or the insurer-backed master trusts.
Such competition would require strong, sustainable and well-governed pension providers. Further, in an industry that has well-run not-for-profit trusts schemes, it would boost funds investing with the sole aim of the best outcome for members, not the dual goal of profits and returns.
Jonathan Williams is deputy news editor at IPE