This week saw the introduction of automatic enrolment in workplace pensions. From the start of October, employers now have to enrol their employees in a workplace pension, in a phased introduction that starts with the largest employers now and ends with the smallest employers having to do so from 2015.
The idea of ensuring that everyone is making provisions for their life after work is certainly a worthy one (and a pragmatic one, given our ageing population) but one of the fundamental problems with the pension system is how little people really understand about it.
Recently, my colleague, Sean, wrote about the fact that we don’t teach young people about tax and this is an issue that continues across many other areas of financial understanding, including pensions. It is also a problem that has persisted for decades.
A study from the Prudential, released this week following the change in regulations, claims that 46% of UK business owners are not putting enough funds aside for retirement. What is more, 29% are looking to the state pension to be their only source of income in retirement. If the current generations of workers and business owners are failing to manage their own pension provisions adequately, what hope is there for the next generation?
Although a pension may seem so far away as to be irrelevant to a school-leaver, the problems that accrue from people not building up sufficient pension pots of their own are not limited to the individual. Anyone living to retirement age without sufficient funds is likely to become a bigger burden upon the state, in terms of the social and health care required to support them. As we live longer and the average age of the population increases, those problems are also going to increase.
So it’s a good thing that the new system will require anyone aged between 22 and the state retirement age to be automatically enrolled in a scheme but it still doesn’t change the fact that the average 22 year old still won’t have a clue if the scheme they’re in is the right option for them.
As with student loans, there is a lot of confusion over pensions, with many young people recognising that it’s something that they will have to deal with but not really knowing how to go about about it. That confusion is only exacerbated by the constant use of jargon over clear language by the financial services industry, yet this could be remedied by better financial education.
Ensuring people understand the system is much more likely to make them play an active part within it, and that leads to us having a much better chance of tackling its problems.