Rosie Crowley – 27 August 2020
Will COVID be the driver for change in how pensions operate?
Necessity is the mother of all invention, a phrase famously coined by Plato many years ago. And if we’ve observed anything during the pandemic, it’s been that a saying from two millennia ago has stood the test of time, and never been more true.
From 24 July it became mandatory to wear face masks in shops and supermarkets. Now for most, this isn’t really a problem (albeit perhaps a little uncomfortable). But what about the 12 million people in the UK who rely on visual cues and facial expressions to communicate? For these people who are deaf or hard of hearing, their necessity is being able to see someone’s face, which a face mask takes away. But as Plato predicted, transparent face masks have been invented to combat this issue [1].
We’ve also observed some of Plato’s wisdom in how the pensions industry has pivoted to accommodate individuals and businesses in the pandemic. In this blog we want to share what we have seen and look to the future, to understand how COVID could overhaul the pensions industry completely.
Everyday flexibility
I think it’s fair to say that the pensions industry has a reputation for being pretty inflexible. The reason behind this is the very admirable intention to protect people from poverty when they stop working, which in turn has led to significant legislation and regulation. However, what this has actually done is hamper the ability of the industry to respond to social and economic change.
Globally, we have been in unprecedented times and we have seen pension providers from the UK to Australia attempt to offer flexibility to members and employers. In the UK, for example, Smart Pension has allowed members to pause rather than cease their membership, so individuals in financial difficulty are not forced to opt out. They’ve also introduced flexible payment plans for employers so that they could defer paying their contributions until they received financial support from the government’s Job Retention Scheme [2].
The Australian government introduced the COVID-19 early release scheme, which allows eligible Australians to take out $10,000 from their super in the 2019-2020 financial year and an additional $10,000 in the 2020-2021 financial year. The scheme has been very popular, but perhaps with unforeseen consequences as now over half a million of Australians have emptied their accounts [3].
With great power comes great responsibility
The industry needed to respond quickly to COVID, and in many cases it did. However, we need to be careful when change is introduced to ensure there aren’t unintended consequences making the situation worse in the long term.
For example in the case of Australia, the COVID-19 early release scheme, although innovative and important, really does have big consequences for people in the future. In fact, those taking $20k out now will forego $60k at retirement. This worsens the divide for not only low earners but also women, who were already facing a retirement savings shortfall before the scheme was introduced [3].
When we look to the future and the big changes which may come along, we need to make sure we learn from our mistakes and map the possible outcomes to manage and/or mitigate those risks. For example, would we still have allowed such a drastic change from DB to DC when companies started closing DB schemes, if we had fully understood the size of the pensions gap that was going to emerge?
We need to take the learnings from the pandemic; that the industry can be flexible when it needs to be, and can learn from the past to really make the changes which deal with the inequality and inadequacy in retirement provision.
Looking to the future
As the pandemic continues for longer than we had hoped, we are seeing people being out of work for a significant amount of time, approaching retirement with even lower provision and worsening the divides which already exist. The government and industry need to start responding to account for the “new normal”.
For example we highlighted in our last blog the disproportionate effect that COVID has had on the younger generation, compounded by the fact that this cohort don’t have significant financial resilience. Could there be a rise in the supply and popularity of sidecar schemes, such as the vehicle being trialled by NEST? [4]
Likewise, what could be done to reduce the gender pensions gap. Could better responsible investment practices be the answer? Women working for companies with poor maternity policies and records on inequality are investing in those companies through their pension. Could a stronger voice on gender from the pension industry influence companies for the better, thereby improving their members’ lives. Or is it about where we channel our money? Could pension schemes invest small amounts in impact? Financing start ups and social enterprises supporting women.
A trend we have also seen from the pandemic is the shortening of timescales, the most impressive being the speed at which a vaccine is being developed. Could we see the rise in minimum contribution rates come forward, or could we see Universal Basic Income becoming a more certain concept in lieu of the furlough scheme, and how could this be used to help boost retirement savings? [5]
Ultimately we don’t know what the future looks like, but what we do know is there needs to be change, and what COVID has taught us is that change is possible. After all, necessity is the mother of all invention.
[1] https://www.wired.co.uk/article/clear-face-masks
[4] https://reba.global/content/financial-wellbeing-a-workplace-savings-sidecar-is-a-must
Leave A Comment