Pensions and retirement planning
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Research Division, Department for Work and Pensions, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 83
by Alan Hedges
This report explores public attitudes, knowledge and aspirations in relation to pensions and retirement planning and was designed to inform the government’s Pensions Review and to feed into policy considerations in this area. Sixteen group discussions were carried out in Autumn 1997 with 97 members of the public. The study covered a broad cross-section of the adult population, including both pensioners and people of working age. It was carried out for the Department of Social Security (DSS) by Alan Hedges, an independent social research consultant specialising in qualitative research. The main findings are:
- The complex and changing pension system is often poorly understood by the public. Pension planning is often limited and belated. Most people under 40 no longer count on getting a state pension. Older people believe the state pension will continue for them, but not for their children and grandchildren. But hardly anyone wants the state to withdraw, because it seems to offer reliability and fairness and can take care of those with limited means.
- Most people feel the state should provide a 'bread and butter' pension. This would be higher than the current basic pension which is generally felt inadequate. Most people thought the single person's pension should be between £80 and £120. With some provisos, working people were usually willing to pay enough extra National Insurance to fund another £10 a week on the basic single pension, and probably to add another £20-£30 - but there was often some hesitation about paying for larger increases, desirable though these may seem.
- Most people are strongly opposed to means-testing the basic state pension. Everyone who pays in should be able to draw out as of right. Most participants approved of asking high earners to pay more into the system, but not of withdrawing their pensions once they have paid for them.
- Given an adequate bread and butter pension, it is largely seen as up to individuals to decide how far they want and can afford to provide jam on top. However it is widely felt that people should be exhorted to provide themselves with at least a minimum layer of jam, and many favour an element of compulsion for fear that they may otherwise neglect to invest the right amounts at the right time. Most people would be happy to accept a pluralistic approach through the public and private sector for this second-tier pension.
- At the time of the research the Government had not published details of the proposed new Stakeholder and Citizenship Pensions and awareness seemed very limited, but with some qualifications the concepts were generally well received.
- Many people would like the state to play more of a role as a regulator as well as a provider. People need more, better and more accessible information and help about both state and private pensions, and want the government to make sure the public is properly informed and advised.
Introduction to the study
The study is based on a set of 16 group discussions involving 97 members of the public. It was carried out for the Department of Social Security (DSS) by Alan Hedges in eight locations in England during Autumn 1997. Group discussions are designed to provide understanding of the way people think and feel, rather than statistical evidence.
The aim was to provide information about public attitudes, knowledge and aspirations in relation to pensions. This was needed both to inform the government’s Pensions Review, and to feed into policy considerations in this area.
The study included a broad cross-section of the adult population, including both current pensioners and people of working age.
Complexity and uncertainty
The pension system is highly complex, and often poorly understood. This applies both to the public and private sectors. Rapid changes in recent years have further destabilised people’s perceptions, and left many feeling uncertain and confused and sometimes anxious about the future.
There are frequently doubts and insecurities about what will happen. Many assume that the state pension has a limited future life; yet so far the burgeoning private sector options often arouse feelings of confusion and insecurity rather than a sense that exciting new doors are opening. This is partly because it is a new and unknown world to many, but also because the personal pensions sector has a risky image, compounded from headlines about mis-selling and Maxwellian fraud, fears of provider bankruptcy, vague projections of future values and mistrust of pensions salesmen.
Pensions planning
Pensions planning often seems both limited and belated. Traditionally there was little to plan for most people - state and occupational pensions seemed semi-automatic, and personal pensions were not common.
In today’s more fluid context there is greater need to plan pension provision, but many lack the knowledge and understanding they need to do this effectively, and do not find themselves well equipped to take decisions or choose between options.
This lack of understanding embraces both the system in general and the individual’s own personal position within it:
- Many people’s pictures of what exists and how it works contain large gaps and sometimes important misconceptions.
- Most people aren’t sure where they personally stand or what sort of pension income they can expect - partly again because of limited understanding of the system, but also because they do not have useable projections of their prospects. The DSS forecasting service is rarely known, and private sector pension projections often seem incomprehensible and uncertain. Future pensions are to some extent inherently unpredictable, but people’s uncertainties often go well beyond this inevitable margin of error.
Other factors besides lack of knowledge and uncertainty also often deter effective planning of pensions. It is a field in which many people delay coming to grips with decisions partly simply through inertia, but also because retirement is an uncomfortable notion which seems a long way off, and less pressing than many more immediate financial commitments.
Moreover there is often little spare cash at early stages in people’s working lives, the point at which investment in private (occupational and personal) pensions would do most good. The advantages of early investment are usually only vaguely recognised at best, and probably widely underestimated. Many people only start to become focused on pensions in their 40s or even 50s, when retirement begins to seem an alarming reality on the horizon.
All this means that many households do not get to grips with essential decisions about pensions investment until too late. While there are signs that young people are now usually more pensions-aware than their parents and grandparents had been, they still often seem just as reluctant to grapple with the issue until too late - and for the same sorts of reason.
Role of the state
Most people under 40 no longer count on getting a state pen.sion at all. They typically assume it will either disappear; or will be limited to people in poverty; or will get too small to be of much use. Older people (includ.ing current pensioners) usually believe the state pension will continue for them, but not for their children and grandchildren.
Views vary about how far state withdrawal is inevitable. Some assume the state just won’t be able to afford to go on paying pensions on the current basis, but many others feel the money could be found for them it is mainly a matter of political will.
But hardly anyone wants the state to withdraw. They not only feel that obligations to those who have already ‘paid in’ should be honoured, but beyond that the great majority of participants would prefer the state to stay in the pensions business long-term.
They feel this for a variety of reasons. As people picture it, the state:
- can look after those with limited resources, whose needs would not be met by the private market
- seems more likely to operate fairly by balancing needs and resources across different sectors of society
- still appears safe and reliable in various ways the private sector does not:
- it doesn’t seem likely to go broke, embezzle the funds, or pressure people to buy profitable products they don’t really need.
- nor does it depend on the vagaries of the stock market, or on picking the right product.
Moreover the state scheme obliges people to put money aside throughout their lives. And although the scheme is complex and not well understood it mostly runs automatically and doesn’t involve much decision-making or hassle. Buying personal pensions by contrast needs more active participation, and usually seems much more fraught and uncertain.
The private sector also has attractions - it offers choice and flexibility, and many guess that it might produce a higher return on the money invested.
Bread-and-butter pensions
People feel it is very important that they should be able to count on building up a bread-and-butter pension that is simple, automatic and risk-free – and enough to provide a secure and comfortable albeit basic lifestyle. They would prefer this to be provided by the state - because of the fairness and reliability described above, and also because many doubt that the private market would meet the needs of those least able to pay. If the state withdrew from this bread-and-butter role some compulsory alternative would be needed – most people would worry about just leaving it to individuals to make their own arrangements.
However the current basic state pension is generally felt to be inadequate. Most people felt the single-person’s pension should now be between £80 and £120 a week instead of the present £62.45 (1) .
Pensions and benefits
In considering the basic state pension the public often overlook the fact that pensioners can also get various benefits if they have no other means, but the general reaction when combined pension-plus-benefit figures are presented is that these still seem inadequate.
Most people feel that a state pensioner should not need to claim Income Support (IS) - indeed they see this as paradoxical. Pension entitlement is based on contributions, and most people feel that having 'paid in' gives them a special entitlement - and yet the Income Support level is higher than the basic state pension, and those who have not paid contributions would get more than a fully paid-up state pensioner. This is not something many people realise, but it strikes most as anomalous and wrong when they discover it.
There is also often disquiet about the fact that IS thresholds can leave those who have worked to provide themselves with a small occupational or personal pension worse off than those who have made no provision at all. This appears unfair and demotivating.
Increasing the basic pension
Most participants (including younger workers) therefore felt that the basic state pension should be increased. £80-120 a week for a single person was usually thought a suitable level - £100 was the most common suggestion. When working participants were challenged they seemed willing to pay more National Insurance (NI) to achieve this - certainly to a level which would add another £10 a week to the basic single pension, and probably to add another £20-30. The general feeling was that pensioners should really get an extra £40 a week, but many doubted whether workers should be asked to pay as much as this would cost.
However, this willingness to pay has various provisos:
- Younger workers would need to be reassured that the system will continue, and that they are therefore making an investment in their own future as well as supporting today’s pensioners.
- The extra money should be “seen” to go to pensioners - not just another extra tax disappearing into the murky pool of general government spending.
- It will be important to reassure people that increased NI charges will not reduce employment.
- People might react differently if this was part of a much larger package of increased charges.
Most participants also felt that the costs should be loaded more heavily towards high earners than the example figures they were shown - people on £100 a week should not be asked to pay more, while those earning £600 a week or more should have larger increases. Some challenged the idea of an upper earnings limit for NI.
Means testing pensions
Hardship for those living on the basic state pension could be alleviated without asking the working population to pay more if payments to the better-off were withdrawn and redistributed to the poorest pensioners. However, only a small minority of participants favoured means testing pensions, and most seemed fairly strongly opposed.
Many people have reservations about means testing in general, but particularly in relation to pensions. Individuals have a strong sense of having 'paid in' for their pensions, and it seems unjust to tell some people they can’t have them. It is widely felt that everyone who pays in should be able to draw out as of right.
Moreover means testing seems an expensive and intrusive process, which can penalise those who have worked to provide a bit extra for themselves and thereby pushed themselves over the threshold. Because means test thresholds are usually close to the ground they also arbitrarily exclude people who are really in need but who narrowly miss qualifying.
Some of the objections to means tests would weaken if they cut in high up the income scale rather than near the bottom. However, this is still challenged on fairness grounds, unless those excluded are allowed to opt out of their pension contributions (2) .
Most people approve of asking high earners to pay more into the system, but not of withdrawing their pensions once they have paid for them.
Jam for the bread
Given an adequate bread-and-butter pension as a baseline it is largely seen as up to individuals to decide how far they want and can afford to provide jam on top. However, it is widely felt that people should be exhorted to provide themselves with at least a minimum layer of jam, and many favour an element of compulsion for fear that they may otherwise neglect to invest the right amounts at the right time.
At this second-tier level people are usually less concerned whether provision is made through the private sector, the state or both – most would be happy to accept a pluralistic system. The possibilities of the private sector appear more convincing in this context than in the basic pension field.
The State Earnings-Related Pension Scheme (SERPS) will increasingly provide extra pension for many people, but there is a surprisingly widespread dearth of information about this. Many people don’t understand what it is, or even whether they stand to benefit from it. The fact that members can contract out is fairly well known, but even those who have done so often admit that they don’t really understand the implications. Misconceptions abound - for example some assume that having opted out of SERPS means they won’t collect even a basic state pension.
Images of different pensions sectors
The public generally lacks the information to make factual comparisons between the different pensions sectors, but as suggested above people do have images of their likely strengths and weaknesses.
Personal pensions seem highly flexible and offer choice. They are often assumed to deliver a better return, but they also seem riskier, less familiar and more confusing.
State pensions seem safer and more reliable, fairer to different sectors of society, more familiar, and less hassle to operate.
Occupational pensions share some characteristics of both personal and state pensions. They can provide a good return, and seem simpler and more automatic for their members than personal pensions, although they offer less flexibility and choice. However, they:
- are not available to everybody;
- sometimes exclude part-time, low-paid and contract workers;
- and seem vulnerable to job changes or redundancy.
Regulating pensions
Many people would like the state to play more of a role as a regulator as well as a provider. At the moment they do not feel protected from abuse. There are widespread concerns about private-sector provision, fuelled both by media reports of pensions mis-selling and high charges, as well as by perceived pressure from pensions salesmen. People are not usually confident:
- either that they will be sold what they really need, as opposed to what is profitable for the supplier;
- or that they know enough about pensions to recognise what they need if they see it.
Information and advice
People need more, better and more accessible information about pensions. Many are nervous and confused because they don’t feel they really understand what there is and how it works - and this goes for state as well as private sector pensions.
They lack information about the way the system works in general, but particularly about their own status, prospects and options. Currently many simply don’t know where they stand. They should know what they are likely to get, what they need to invest to get a given level of pension, and what options they have. At present few people could provide confident answers to these questions.
Within the state sector there are various gaps to plug and misconceptions to correct. The most obvious requirement is to clarify the role and status of SERPS, and to promote the DSS forecasting service.
More generally there is a particular need to communicate the vital importance of early investment in pensions. The whole concept of second-tier pensions should be more clearly established. In the personal pensions field people need better understanding of (for example) what happens if:
- they need to vary or suspend payments
- they can’t pay very much the provider goes bust
- they die before retirement.
As well as information the public also need better, more accessible and more independent advice particularly about the new, confusing and potentially deceptive world of personal pensions, but also about (for example) the level of personal pension investment, SERPS opt-out decisions, joining voluntary occupational schemes, and Additional Voluntary Contributions (AVCs).
At present most people feel they lack credible sources of accessible, affordable and disinterested advice. Many would like the government to play a more positive role in making sure that the public is properly informed and advised - particularly if they are expected to take more responsibility for their pensions.
Additional payments
Most people favour retaining the Christmas Bonus for pensioners, although the case would weaken if the basic state pension improved substantially. However, the amount (£10) is usually thought to be too small, and many wanted it increased to at least £15-20.
However, most do not believe there is a strong case for an 80+ Age Addition even in principle - the usual argument is that it doesn’t cost some one more to live simply because they have reached 80. However, a minority take a converse view, arguing that older pensioners do often have higher costs - for example in heating and healthcare. The current amount of 25p a week is generally agreed to be insultingly small and of no practical value.
The government’s proposed new pensions
At the time of the research the Government had not published details of the proposed new Stakeholder and Citizenship Pensions and awareness seemed very limited, but with some qualifications the concepts were generally well received.
Only an early sketch of the Stakeholder Pension concept could be presented at the time of the research and this struck some as a little vague, and some felt it would not add much to existing opportunities. However, most thought it sounded worthwhile, and it seems to have potential to meet several of the needs people expressed, if without increasing tax or NI it could offer:
- a single regulated and branded entity in place of a plethora of uncertain and confusing products
- the security of government backing - particularly if this includes some kind of guarantee
- low cost entry and controlled charges
- flexibility to meet changing needs and circumstances.
However, the appeal of Stakeholder Pensions will depend on clear and effective publicity as well as on the merits of the scheme.
The Citizenship Pension concept is widely endorsed in principle - providing it applies to bona fide cases and is not abused, and with some questions about what it might cost.
Sub-groups
The needs of various important sub-groups merit further study. For example:
- some self-employed people seem unclear about their pension situation, and may be poorly provided.
- part-time, low paid, short-term and contract workers can all find it difficult to provide second-tier pensions.
- some women are disadvantaged: by broken, part-time or low-paid work patterns; and still sometimes by traditional reliance on the male partner’s pension which can cause problems when partnerships are ended by separation or death.
Relevant publications
Other publications on pensions:
C Hawkes and A Garman (1995) “Perceptions of Non-State Pensions ”(DSS In-House Report No 8)
J Field and G Prior (1996) “Women and Pensions ” (DSS Research Report No 49). London: HMSO
G Prior and J Field“ (1996) Pensions and Divorce” (DSS Research Report No 50). London: HMSO
B Casey, J Hales and N Millward (1996) “Employers’ Pension Provision 1994 ”(DSS Research Report No 58). London: TSO
D Dundon-Smith, J Hales, M Chetwynd, A Thomas and J Keegan (1997)“ Pension Scheme Inquiries and Disputes ”(DSS Research Report No 66). London: TSO
K Bunt, D Howells and M Winterbotham (1998) “Experiences of Occupational Pension Scheme Wind-up” (DSS Research Report No 75). London: TSO
K Bunt, M Winterbotham and R Williams (1998) “The Role of Pension Scheme Trustees ”(DSS Research Report No 81). London: CDS
C Pratten and S Satchell (1998) “Pension Scheme Investment Policies” (DSS Research Report No 82. London: CDS
Footnotes
(1) This reflects the situation at the time of fieldwork (Autumn 1997).
(2) But if high earners opted out it would leave less money in the system, which would defeat the purpose of means testing.