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Your choice: over and out

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Minimum employer pension contributions to double and employee contributions treble but it still isn't enough. Ian Neale looks at the tough decisions members are facing in the coming months.

In a famous paper published in 1956, the American psychologist George Miller proposed that the number of items the average person can hold in working memory is limited to seven, “plus or minus two”. Others have since claimed the figure is no more than four, though it depends a bit on the complexity or familiarity of the material (eg digits are simpler than words, and everyday words simpler than technical terms like ‘drawdown’).

It is not surprising then that we have readily ceded control of information processing to computers, which have no such limitation. Computers tend also to be freer of the biases which infect human thinking. So-called ‘robo-advice’ has entered the world of financial planning, though it must be acknowledged that the primary driver has been the unwelcome cost of human expert advisers.

It’s often hard enough to make immediate decisions on the basis of information to hand, never mind the multiple ‘ifs’ that enter the fray when planning for the future. So people focus on the here and now. What are my immediate needs, and how can I meet those needs?

‘Cash is king’, it is often said. As a people, we’re not really into deferred gratification. No surprise then that flexible access to money purchase pension pots has been such a runaway success (calling it ‘pension freedoms’ has also helped, as did the 1988 government encouragement to members of fuddy-duddy final salary schemes to throw off those chains and set up personal pensions instead).

Automatic enrolment is pushing us in the opposite direction, to salt away money for decades. We don’t have to, though: we can choose to opt out. Next month, minimum employee contributions are set to treble. Whether this triggers a significant spike in opt-outs will be an interesting test of the power of inertia, it is said. Failing to exercise a choice means we stay in the pension scheme and save more.

I don’t think that’s the whole story, though. Leaving aside those who live so much from week-to-week that maximising cash-in-hand is all-important and so opt out, there could be a significant number who feel pulled in both directions. They strive to choose, but feel paralysed by the amount of information presented. Like certain politicians, they’d like to feel able to have their cake and eat it: to save in a pension, but to be able to get their money out if something happened.

The advent of ‘pension freedoms’ has fomented the view of pensions as bank accounts, albeit ones that don’t offer an overdraft facility. That genie is out of the bottle, although the accompanying message ‘once you’re 55’ has also resonated. So a kind of compromise termed ‘sidecar benefits’ has emerged, the idea being that a portion of future contributions under auto-enrolment might be placed in an ISA-type vehicle alongside the pension fund.

It’s in our collective interest that auto-enrolment continues to succeed, but we must recognize that even age 55 is a distant prospect for many who recoil from the idea of locking their money away for so long. Asking people to think rationally might achieve the desired objective, but in most cases only as a result of paralysis induced by being required to make a positive decision with so many pieces of relevant (and incomplete) information.

Next month is a big test: minimum employer pension contributions double (from 1% to 2%) and employee contributions treble to 3%. In twelve months time employer contributions rise again, to 3%, and employee contributions to 5%. Even then, 8% of qualifying earnings is not going to provide an adequate supplement to the state pension. We know that: what are we going to do about it?

The government thinks it'll be enough to make a few tweaks to auto-enrolment in about seven years; no hurry. 

Will that be too little, too late?

Ian Neale, Director, Aries Insight