ARCHIVE: Will You Be Hit By The UK Pensions Crisis?

20:36I'm in Southport so I can see it across the water but it's an hour drive.

20:40Tom McPhail:I'm a bit further north so anyway we digress. So because the disparities in life expectancy it becomes increasingly problematic just to keep pushing up the state pension age because you get increasing numbers of people who are going to say well why am I paying into a state pension system where I'm probably not going to benefit from this. I'm not going to live long enough to even get my pension back out the other end. So you have to start asking questions around, well, do we means test it? Do we say, okay, rich people just don't get the state pension anymore. They don't need it. They've got lots of money.

21:11Tom McPhail:We're just not going to give it to you because that's quite a difficult message to sell. You've still got to pay into it though. Still going to pay into it. And actually means testing is pretty bureaucratic. So it costs a lot of money to administer as well. Do you test people's eligibility for the state pension based on their life expectancy? Do you say, well, you're in good health, you young men sitting across the table from me, you're obviously very healthy, you're not going to get your state pension until you're 80 because you're going to live for another 20 years after that. That's very divisive.

21:41Tom McPhail:That's a really problematic thing to do as well. So there's no easy answers to that. And by the way, more than 50 % of retirees rely on the state pension for more than 50 % of their retirement income. Even the richest cohort is a third of their income. It's a really important slice of people's retirement. So you can't just turn the tap off, right? So then how do you manage that? Because as the population ages, more and more of the state spending has to be diverted into pensions. And of course, it's not just pensions, you've got social care, and you've got health care as well. Over the next 50 years, the proportion of state spending devoted to pensions, social care, and health care is set to rise from 15 % today to 25 % of state spending.

22:27Tom McPhail:More and more of the state, at a time when we need to spend more on defence and other things as well, more and more state spending is going to have to be devoted to paying for those older people. And in that context, how do we prop up of state pension. So the only thing that fixes that is getting people to save more of their own money to build up private savings. Now, you can do other things as well. Like over the long term, we could take a 50-year run-up at it and say, let's just start diverting a little bit of state money now into a national wealth fund, a pool of money that's run and owned by the state that in 40 or 50 years time could build up to the kind of level where it could sustainably pay for some of the state pensions rather than it all coming out of current taxation.

23:06Tom McPhail:Maybe that's the kind of solution we need to look at now. So it's great that politicians are talking about possibly doing a review of pensions, but I think they need to think quite radically because these are really big problems that need quite a long run up to fix. You know, Bill Ackman, the investor, he's like a, they call him like the new Warren Buffett. I don't know if he is. He's just a value investor. But he spoke about this idea that rather than what we do is essentially we backload the pension work, don't we? We take the tax, we pay it. There's no compounding, there's no leverage of time.

23:37So instead, when a child is born, put£5 ,000, dollars, whatever, into an account in a global index in like a SIP kind of product.

23:45Tom McPhail:SIP bank, let compound interest do its thing. It's a million quid by 60. Obviously, inflation is going to eat away at that, but it's something, right? It means that at 20, you ought to enroll them in and they've already had 20 years worth of compounding. And that takes the pressure from 150 billion a year to, say, 5 billion a year. And you would basically say, almost like smoking, anyone born from today will never get state pension and then you maybe have national insurance that pays for that instead. Yeah. I don't know if there's holes in that plan, but... Essentially it's sound. I mean, and as an aside, if you're a wealthy individual today and you've got children, ploughing money into a pension for your children from the get-go, as you've just described, is one of the most generous gifts you can make to your children.

24:27Tom McPhail:By the time they get to 20, they've already done a huge amount of the heavy lifting that's needed to provide for their retirement further down the line. my own experience with my own children is they'd rather have the money now. They can't touch it if it's a sip. That's what Damien gave me the knowledge on that. I got my son a junior ISA and a sip. So I'm like, if he wants to blow the ISA when he gets to 18 or like spend on a car or something, he can, but I prefer if he put more money into it himself. But the sip, at least, you know, that's safe. Like Peugeot 206 with a body kit at 18. Spinning rims.

24:57When he figures out, he needs to sort his life out at 35. He's got a sip that's done some compounding. Exactly.

25:02Tom McPhail:Which I really like. And he can take over. So back to your question, in theory, yeah, the state could start doing that now. I mean, the problem is we're talking about, top of my head, like 12 million people in this country under the age of 18. I mean, it's something in that kind of ballpark, right? So putting thousands of pounds into an account for them, there's several hundred thousand babies being born in this country every year. We're not talking small change here. No. It's quite big money. So it's how you find the money given the current constraints of public spending already. but maybe they could start small and just...

25:34Tom McPhail:It would get more expensive before it dies, because you'd basically need the current generation to die to remove the costs. So you sort of end up paying for two systems at once in the short term. Yeah, yeah, so it would be expensive initially, you were right. But, you know, you could maybe start small and start building it up, and I think that something that takes us around that road, we've got caught in this trap of pay-as-you-go state pensions, and that wasn't a problem until suddenly everyone started living longer and the working age population started shrinking and then the tensions have emerged.

26:06Yeah, you speak about the social contract as well. You need to believe that you're going to get one to pay into it, don't you?

26:13Tom McPhail:Well, yeah. And why as a politician would you fess up and say to the 20 and 30-somethings today, look, I want you to keep paying the taxes because our pensioners need that money today. but to be honest, I'm not sure you're going to get your state pension when you get there. I mean, politically, that's just not going to wash, is it? So we have to maintain this assumption. I mean, I hesitate to use the word fiction, but we have to stick to the narrative of, yes, it's all going to be fine. Everybody just keep paying in and everybody will get their share in due course. And to a degree that works, but you look at the numbers and you think, well, well, you know, am I going to get a good deal out of this?

26:52Tom McPhail:Maybe I'll get something. Will I get back as much as I've put in? I'm not sure anymore. And the worst thing about it is if people weren't paying for the state pension system, they'd have more money to save for their private pensions. Well, they would. Obviously, their grandparents would be destitute at that point, so that's awkward. You're only going to have to have some tough conversations with Granny, but look, sorry. Talk about me now, Granny. You've had your turn. Yeah, yeah. So, look, there's no simple answers with all of this. But, yeah, I think to a degree that's what auto-enrolment was trying to do.

27:25Tom McPhail:It was trying to say, look, okay, let's just reset private savings and start building up the pot and use the leverage of employer contributions to build up an adequate private provision that then might give us a bit more flexibility in the long term around the demands on the state pension. But that's stalled, as we talked about. The auto-enrolment is like a great example of a psychological nudge. It just relies on people's apathy towards cancelling something, doesn't it? They found that if you ask people to sign up, they won't. But if you auto-enrol them and ask them to opt out, only 10 % of people will.

27:58Tom McPhail:And an illustration of the genius of this was even the Department for Work and Pensions own forecasts, when auto-enolment was introduced, were that around 30 % of people were going to opt out. The people would get put in and then would have really high numbers of opt-outs. the reality was it's been consistently below 10%. So people do opt out, but quite often then, because we also re-enroll them every three years, you know, relentlessly, we just keep sticking them back in and we wear them down and in the end they save for a time. And whenever they change jobs and things like this. Back in again.

28:27Will, our producer at the back, when I first started this podcast, he was like, I opted out of that crap. I was like, get yourself back in that thing. That's free money.

28:35Tom McPhail:You know, and that's the thing, you know, it is free money. I think what I think is interesting with that is how that programme is now stalled. So in 2017, there was a review of auto-enrolment and there was a recommendation to take that bottom slice of earnings disregard away so that pension contributions would be calculated from the first pound of your income rather than cutting off the first£6 ,000 of your income. So do that and also start auto-enrolment from age 18 instead of 22. These were not controversial proposals. Everybody agreed that was what we needed to do. And here we are in 2024, and it still hasn't happened.

29:13Tom McPhail:So even that simple adjustment to the original programme of auto-enrolment, we haven't even managed to make those simple, small changes. I think that's illustrative of how hard politically it is to take money out of people's pockets. Any adjustment is really difficult. And I think to move on beyond here, to get those contribution rates up to 10%, 12%, Australia have managed to get to 12%, that's the kind of level we need to aim for. you need to kind of take a really long drop at it and this is where your behavioral thinking comes back in again if you more to drop it and say look this is everyone agree now we're going to do this in five or ten years time and everyone goes oh it's too far away to worry about okay fine well we'll sign up to that now and then when you get there it's already kind of baked in in people's expectations that this is what has to happen and everybody's in there together we need to do something like that because at the moment we stalled at level that is plainly inadequate.

30:06So how did we introduce auto-enrolment if we can't just tweak it slightly? Because that seems like a big reform, doesn't it? Yeah, exactly. Introducing it seems like more of a reform than just tweaking the age and...

30:18Tom McPhail:So there was a particular window of opportunity in the early 2000s when we had a Blair government with a huge majority, a disorganised opposition who were really not in a position to influence government policy at all. And the smart move that Gordon Brown made as Chancellor was to appoint a guy called Adair Turner to go away as a commission to go away and look at the question for a couple of years and come back with some recommendations. And they did a lot of really serious heavy lifting around every aspect of the challenges of the pension system. They came back and said, look, this is how we fix the problem.

30:50Tom McPhail:We'll bring in this auto-enrolment programme. They made other recommendations like reforming the state pension and possibly looking at the the way tax relief operates as well. But the central recommendation was, look, we'll use employers. We'll just use this nudge. We'll just put everybody into a pension. We'll give them the right to opt out if they want. But you know what? They probably won't. And everybody went, huh, yeah, that looks like a good idea. Let's all do that. So they got consensus right across all the political parties signed up to it. The unions signed up to it. The employers signed up to it.

31:19Tom McPhail:Everybody agreed this is a solution we can get behind. So that commission gave the politicians the air cover to say, this is how we start fixing the problem. To my eyes, we need to do something like that again if we're going to move on from here. Why did the employer sign up? Because did it cost them a load of money? Because the threat was, if you don't do it voluntarily like this now, we'll just force a solution on you. We'll impose a mandatory solution later on, which will be even worse for you. And I mean, the reality is employers, they know people value pay more than they do pensions. We all, you know, bird in the hand, two in the bush.

31:54Tom McPhail:We'd rather have the money in our bank account now. So if I give you money as pay, it'll always make your eyes light up more than if I say, oh, by the way, I've put some money in your pension for you. And you go, well, that's great, but I can't spend that down the pub this weekend. So employers reluctantly agree to the pension. At the same time, they know that if we have a workforce with no retirement provision, in the end, it's a collective problem that we all have to deal with. So, you know, they were slightly reluctant, but they were also willing to go along with it because they recognized they had a role to play in it.

32:28I can see the importance of increasing the saving rate and getting it up to 15%. But I can also acknowledge the difficulty in doing that at a time of cost of living crisis and all of these things. Would not a better approach initially just to be to increase the participation people have in their own pension to get them out of default funds. So they're not just sat in funds that take little risk. I've got a big issue with the default funds.

32:53Tom McPhail:Yeah, yeah, no, I'm with you on that. And one of the problems with the auto-enrolment system, it's become a victim of its own success, is you have very little control over your retirement savings, right? So when you change jobs and you go to a new employer, your employer says, right, I'm putting you in this pension. And you might say to the employer, but hang on, I joined a pension two years ago. I've really got a pension. In fact, I've really got three pensions because I've been through a couple of jobs already. Every time I change jobs, my new employer gives me another pension. It's like, this is doing my head in.

33:26Tom McPhail:Imagine if that was your bank account. And every time you change jobs, your employer said, well, if you want pay, you're going to have to join this bank account that I've picked out for you. And you'd be going, hang on, I've banked with this bank for years. I'm happy with that. So I think there's a bit of an ownership problem, a bit of an agency problem with pensions, it makes it harder for people to own that. So I agree with you about the default funds and they do tend to be excessively cautious. And if you're interested in it, within your workplace pension, typically you can go and exercise some choice and invest in something a little bit more adventurous.

33:57Tom McPhail:And if you're in your 20s, you should be taking risks and you should be going for growth. And a lot of people don't. And I think part of the reason for that is because they don't really feel a sense of ownership around the pension. They've been auto-enrolled in. They don't even know what they're investing. So I would love to see that relationship shift a bit more. That's cheap to do as well versus, you know, paying more in. It's structurally quite complicated because everything's built around the employer also enrolling people into a single workplace pension. And you get into issues around payroll and how the money gets paid.

34:28Tom McPhail:And it all gets a bit messy, but it's very doable and actually doesn't cost anything in terms of the contributions. and in the process, and by the way, coming back to the self-employed, most self-employed people go through a period of employment at some point in their lives. I don't know if you guys have. Yeah, yeah, yeah. Right. So if you had been auto-enrolled into a workplace pension, so you arrive in the workforce at the age of 18 or 20 or 24 or whatever, and you know nothing. So someone puts you in a pension and you go, magnificent, I'm glad you did that because I didn't really know what I was doing, and now I've got a pension.

34:58Tom McPhail:But thereafter, if you owned that pension, when you then went self-employed or when you went to your next job you could take that pension with you and say to a new employer you're putting money your money into my pension because it's my pension or now i'm self-employed i own that pension do you know what i should probably keep contributing to it and and your pension company was dropping you an email and saying by the way mate i noticed you stopped contributing are you self-employed now have you thought about keeping your contributions going because it's in everybody's interest you do that i think it could help flip that relationship a bit That's a really good idea.

35:28Pot for life. This is what you're circling on. Yeah, yeah, yeah.

35:31Tom McPhail:Which is what the Conservative government's been flirting with and they've consulted on. Labour have looked at it. Obviously, we've got the general election now. So new government. And it's not immediately clear whether that pot for life idea will survive through into the new government. But yeah, I think it's a really good idea. I think that shift in ownership and the relationship with retirement savings would have potentially quite a profound effect on how people see their retirement savings. Even just, you know, the pot for life of great idea, and I'd love it, like a sip that you could carry around with you everywhere and you can maybe pick the fund providers.

36:07Because at the minute, let's face it, the people on the PSL, as I would call it, the people who can provide the auto-enrolment.

36:13Tom McPhail:Thank you. Sorry. Thank you. It's about time. It was in my head. It's been itching. What's a PSL? Preferred Supplier List. It's a sales term. As in, the way I see the current auto-enrolment scheme is there's a handful of very privileged companies that are like the 10 providers of auto-enrolment. And really, there's like five or six of them that eat the whole market. They own 80 % of the market. Yeah, like the People's Pension, Nest, these kind of... And the variance in fees across them and the variance in fund choices is staggering. For me personally, I think some of them are rip-off merchants when I look at the fees.

36:44Tom McPhail:But you have no control over that. Exactly. Your employer just says, look, I'll pick this pension for you. That's the one you're joining. Yeah, like Nest have got like seven funds. the Sharia Fund is the only one that's 100 % global exposure. The default fund de-risks you for the first five years because they're worried that you might leave if - Yeah, yeah, yeah. And they de-risk you for 15 years at the end. Super cautious. But that was constructed from the trustees' perspective, right? It wasn't constructed from the perspective of you as an individual. And if you're an engaged individual who cares about your retirement savings and wants to build them, that's probably not the best choice for you.

37:16Tom McPhail:No. But as you say, you have very limited choice around where you go with that. But can you move your pension over? Yeah. So you can switch funds within the pension scheme you're in, and periodically you can transfer money out of that pension scheme into another pension. But if you want to benefit from your employer's contributions, if you want to get the free money you're in, you have to stay there. But if you leave the company, then you can transfer the money at that point. Yeah. There's a paper called Death by Default, which I thought was pretty good, this good title. And they did a study where they showed that by being in the default fund, that someone who could have been more cautious, and all we're talking is going from 60 % equity to 100 % global equity, then that might cost them as much as£15 ,000 a year in retirement.

37:57Yeah, I can believe it. So we're saying like find extra money, just teach people to pick a fund that - Let's try and squeeze a bit more value out of the money we've got, right? Yeah, and then£15 ,000 a year is a lot. That's the whole state pension. You know, there's the answer. We don't need to say to everyone, oh, you've got to pay 15 % in or we need to tear up the book. Yes, and this is also why I think the Pot for Life idea makes sense

38:19Tom McPhail:because it would give you complete control over that and you could exercise choice on exactly where the money went. And it's not just about the investment choices. It's about making it easy for people. And a minority of pension providers have got really good at developing apps. And just to pick an example at random, I'm really interested in the way, Lloyds Bank now owns Scottish Widows, right? So there's a real opportunity there to integrate the financial system so you could have not just your banking but your savings and your investments and your personal finance all in one place. Well, that's an interesting opportunity.

38:49Tom McPhail:And whether they will deliver on that remains to be seen. They've got quite a nice banking app already. But you might choose to move your money there, just picking them as an example. I'm not recommending them, but picking them as an example. You might choose to move your money there because of the technology they offer as well. So it's not just about the investment choices and the charges. It's also, I think, really importantly, about what works for you as an individual. Even Vanguard have conceded they need an app. They had this thing. They were introducing Beacon into the UK because they've been like, God, kids like apps, it turns out, you know.

39:18But yeah, I think the tech needs to be cool. And what the robo-investors did was show that if you communicate investment in a simpler language, people participate, right? And they say, oh, we make it easier. They're just another middleman, aren't they? And they put you in a global fund behind the scenes, but they go, oh, are you an owl or a fox or a pigeon in terms of your risk preference? And people like that.

39:43Tom McPhail:Well, and if it resonates with people, I'm kind of okay with that. Yeah, that's what I mean. I mean, because challenge number one is to get people interested in it and care about what's happening with their money and to make that connection with their long-term future. Why don't people care about pensions then? Because they're going to be the most valuable thing they own. Because they're abstract and they're complicated and they're deferred gratification. And, you know, these are all things that are not natural to us as animals. You know, we don't think in those kind of terms. so uh by comparison here's some money now it'll put food on your table it will enable you to go on holiday it'll you know you can go to the pub with it you know that i can get that that's immediate and simple and uh gratifying right so so i get why people struggle with pensions conceptually and you know there's just always something more interesting to do i get that at the same time, along with your house, it is the single most important financial thing you're going to do.

40:42Tom McPhail:And if you don't engage with it, we talked earlier about the self-employed, if you keep not engaging with it, and I've seen this with friends, you get to your 50s and they go, oops, now I've got a problem. Yeah, well, we tried to tell you earlier, you really wish you'd listened more. So we have to keep trying to engage people. And that's why I like the apps and the robos and the innovative firms that try to find ways to make it easy for people. I think that's a really important part of the equation. And have you seen being industry-facing that that has made a difference? Yes, it can do. So it's not easy and I think it is still very much a work in progress.

41:18Tom McPhail:I think, you know, the technology has come on in such a long way in the last 10 years. I think the financial regulator hasn't made it easy for firms in the past. The constraints around what constitutes regulated advice and what firms can and can't say to their customers, that hasn't helped. The regulator recognises that and they're trying to make it easier for financial firms to give customers information that will help steer them towards better outcomes. It's a work in progress. At this stage though, shouldn't it just be taught in school? Pensions should be a topic because it's all to do with the country and the government and all of our futures shouldn't it be like very important and be on the syllabus rather than learning about the battle of hastings or like 1066 and all these things that's some good stuff but like it doesn't really help me when i'm like 60 and i'm broke so the problem with that so i'm not disagreeing with you the challenge with that perhaps is when you're 16 17 18 however old right um back to the point about them being quite abstract this is how a mortgage works this is how a fixed rate deal works.

42:23Tom McPhail:This is what a Sharia fund looks like. This is what a balanced risk fund looks like. This is what a good savings. This is how pensions work. This is what unit allocations look like. What? Come on. Show me something more interesting. Crypto. Right. So the challenge, I mean, which is why what you guys do is so important. The challenge is to do it in a way that actually engages and connects with people. And I think the challenge doing it through the school, so I'm not disagreeing with you, but the thing that has always struggled in terms of, we've always struggled with in terms of financial education in the school is delivering it in a way that it means something to people in their teens and that is still actionable and useful to them four, five, six, ten years later as they get into the workforce and they suddenly go, oh, now what was it they said about a mortgage or a pension or whatever?

43:09Tom McPhail:I remember now, I know how this works. It's not easy, right? You need KSI on it, something like that. You KSI a bottle of Prime. That'll speak to my kids. So there's the Money and Pension Service, which is a free resource of financial information. It's slightly under-resourced. It's doing its best. In theory, that's somewhere that a young adult could go, I'm in the workforce now. I've got my pay packet. I need to think about this kind of stuff. They do basic financial information for you. But the outreach is quite difficult because it turns out, again, even as young adults, I'm looking at other things.

43:44Tom McPhail:I'm looking at TikTok. I'm looking at Instagram. My attention is elsewhere, you know, finding ways to connect. It's all about the connection again. It's all about making it relevant to people. The outreach is easy, I would say, because this is what I do for a living. It's just you're in the wrong places trying to talk to people, you know? And I think what the regulator needs to do is go, let's try and instead of trying to stop where people are going for their information, let's just try and make sure that the information in that place is okay and safe. Yeah, bring it to them. Yeah. Well, they're going on TikTok, they're going on YouTube.

44:13That's where the audience is. So you You need to go to the mountain in a sense. I absolutely agree with that. Rather than being like, oh, no, influencers are bad, ban them all.

44:22Tom McPhail:We must send the kids over there to the approved institution. To the fax machine. And guess what? They're not going. No, no, no, that's it. That's it. No, I absolutely agree with you about that. Are you hopeful overall? Because what we're being here is probably quite negative, aren't we, in terms of pensions and the outlook. But are you hopeful for the space? Yes. So I think we've got time on our side, right? So don't panic, right? We can fix these things. We've demonstrated in the past. We've had a really good pension system. We still have many good components of a good pension system. I think what we can't do is get complacent about it.

44:59Tom McPhail:So I think we're at a really pivotal moment in 2024 with the change of government or a new government coming in and a fresh pair of eyes on this. So, you know, there's a big political shakeup going on at the moment, and that creates opportunities to rethink some of this kind of stuff. And so, yes, I'm optimistic in as much as we have the means at our disposal to make changes that will solve these challenges we've talked about. But if we take our eye off the ball, the problem will just keep getting worse. If we talk, so we've spoken about education, the tinkering at the edges that you mentioned in your work of like, you know, raising ages and these kinds of things, and then big political reform that may or may not happen.

45:43But you've alluded to one thing that you've spoken about in your work as well, which is growth. I liked what you were saying around nuclear power plants and shell fracking or something like this. But you were talking about energy saying we need cheap energy and things like this. yeah can we talk about growth and how you feel that that could help the pension industry so well

46:03Tom McPhail:i think the pensions industry can help the growth i mean i think it goes both ways and i think it's really interesting without wishing to get too nerdy about this i'm looking at a big red so let's talk about fiduciary duty and there we go okay that's a bit too nerdy okay so pension schemes have got a couple of trillion pounds in their pockets, right? Big money, right? So the government, and it's interesting, we've heard all politicians now right across the house saying, do you know what we need to do? We need to get those pension funds investing some of that capital in ways that will stimulate the economy, that will help society.

46:39Tom McPhail:Now, the trustees, the fiduciaries, the guys that look after the money on behalf of the members, they're all going, well, hang on, that's not our job. Our job is to try and maximize investment returns for our members. We're given a remit, whether it's a Sharia fund or a global equity fund or a balanced risk fund. And then within that, we try and maximise returns for our members. And what you, the politicians, are saying to us is, don't just think about that. Think also about how you can help society with that capital, how you can stimulate economic growth, innovative finance, putting money into venture capital, building infrastructure, social projects.

47:15The mansion house reforms.

47:16Tom McPhail:The mansion house reforms, exactly. All politicians are now talking about this. And some of them are talking about it with a bit of a green emphasis. how we can transition the economy to lower carbon. I've got mixed feelings about that. Perhaps how we can stimulate the economy to more investment growth. But whatever the set of parameters are, I think there's a change coming where the politicians are going to dictate to the pensions industry a bit more how we get investment growth. And it's ironic that we've heard Keir Starmer talking about this. Well, this is exactly the same stuff Liz Truss was talking about in her brief tenure as prime minister.

47:50Tom McPhail:Basically, the politicians are agreeing we need more growth because that's the only thing that actually in the end will get us out of the economic hole we're in with this ageing population, stagnant growth, high taxation, lots of demands on the economy, defence, health, all the rest of it. If we don't have economic growth, we're all in trouble. The thing about this though is hearing Jeremy Hunt, a failed marmalade salesman in Japan, talk about carving out 5 % of pensions to put into illiquid UK startups, that scares the shit out of me because it's the default funds again. So what you're basically saying is people who do not know what they're investing in, we're going to take 5 % of their future and we're going to throw it, roll the dice on illiquid UK startups.

48:32Yep. That just doesn't sit comfortable with me as an investment approach. And I get like we need to unlock the potential of these funds, but politicians are not investment professionals and politicians act in their own best interest short term. You know, do you see what I mean? There's a big conflict there that I think...

48:49Tom McPhail:Absolutely, which is why I think there's some really interesting conversations coming down the tracks between the politicians and the pensions industry about how we square the circle on that. The counter-argument to that is you look at Canadian and Australian pension funds, right, who come over to the UK and buy all our assets. Those guys are going, do you know what? We've got big pools of money and we see some really interesting investments over in the UK. we're going to buy them up. And the politicians are quite reasonably saying, hang on, why isn't it our pension funds doing that? Why aren't our pension funds going around the world buying up other people's assets or indeed pouring their capital back into the UK in the way that the Canadian pension funds do, because that helps stimulate the economy.

49:27Tom McPhail:So I have some sympathy with what the politicians are saying. I have some sympathy with the need for economic growth. But I also agree with you. In the process, you're crossing some lines in terms of, hang on, I thought that was my money. How come you're getting to tell me where my money has to be invested? Yeah. And is there a conflict as well from traditional finance in the terms of, let's say we take it out of global indexes and we put it into the Italian railway system. Do they lose their 1 % fee? And the London is propped up on this basis of 1 % of 2 trillion. You know, there's a lot of fees in the mix there.

50:05Tom McPhail:Yes, there are. and I mean actually in addition there's quite a lot of, you know, some of this stuff is quite specialised, right? So there's a limited pool of experts that can do this kind of stuff. So on the one side, yes, you've got the fees. On the other side, you've got, well, who are the people who can actually do this effectively? And the battle coming down the tracks is between the investment managers and the pension scheme trustees on behalf of the members currently and maybe in the end ultimately the members themselves and what the politicians demand of them. And the politicians will say, look, in the end, it's all in everybody's interest that we stimulate the economy and we get more growth and everyone will win from it.

50:41Tom McPhail:And I think that's quite a robust conversation that needs to be had there about, well, okay, how do we make that work so it does actually work for everybody? Or am I, with my pot of money, just going to take my ball and go off and invest it in India? Yeah, okay. And you mentioned Canada. So how much do you know about the success there and how that's worked? So I think the two jurisdictions that I mentioned, Canada and Australia, with both of them, they've ended up in a place where they've got relatively few pension schemes. And by comparison, the UK is still really cottage industry. We have several thousands of those defined benefit guaranteed pension schemes I talked about earlier.

51:23Tom McPhail:We have 27 ,000 defined contribution pension schemes, you know, where you just pay money in and the investments grow and then you see what you get out the other end, right? Is that funds or is that providers? Schemes. Okay. Right? And then there are thousands of funds within those schemes, right? It's just bonkers. So when I was saying before there's like 10, these are just the tip of the iceberg. Right. So there are around 35 master trusts, which are the ones you were talking about, the People's Pension, Nest, Legal and General, Now Pensions. There's a handful of big ones. I would say the company-specific schemes.

51:56Tom McPhail:And then there's all the company-specific themes and then there's around 25 ,000 really small schemes that have got fewer than 12 members in. There's a lot of cottage industry stuff out there. It's like, it's bonkers. Why are we doing this still? And every one of those schemes has a group of trustees, has an investment advisor, has an accountant, might have an actuary, has legal advice. I mean, there's a lot of snouts. Big industry, this. A lot of snouts in the trough there, right? We could, and so again, I think on the other side, you know, we need fewer, bigger, better-run pension schemes. We need to crash them all together.

52:26Tom McPhail:And that's where the Overton window is. There's political consensus that needs to happen, and it will happen. The only thing constraining that is the practicalities of crashing pension schemes together. You know, the systems have got to be merged. Data's got to be cleansed. You know, stuff takes time to do. So the only thing that's holding back is how quickly we can do it. So if we move to fewer, bigger, better-run pension schemes, and we will, right, then it becomes easier for the politicians to dictate to those pension schemes where they invest. But also, if you've got one pension scheme with£50 billion in, rather than lots of little pension schemes with a few hundred million each, it then is actually easier for that big pension scheme to say, do you know what?

53:08Tom McPhail:I'm going to put my 1%, which is quite a chunky 1%, into some interesting growth prospects that will stimulate the British economy, as well as delivering long-term returns. And that's the thing, final point on those Canadian pension funds, they're happy to take 20-year views, right? They've got a relationship with their members where no one's knocking on the door saying, what do your quarterly returns look like? How are you delivering? We need to take a long-term view on this kind of stuff. And then it becomes easier to go for long-term growth, which in the long term can be better than just chasing short-term returns.

53:39In comparison, how many funds roughly are there or schemes are there in Canada?

53:44Tom McPhail:So I don't know about Canada. I know it's a relatively small number. In Australia, we're talking about a few dozen, right? It's like compared to thousands here in the UK. But then Australia went through their auto-enrolment 20 years ago. They're a lot further ahead than us, and they've done the pot for life thing that you talked about. So in many ways, they're quite a long way ahead of us. And a recent pensions minister, Guy Opperman, his mantra was, if you want to know where we're going with the UK system, just look at Australia. I mean, the interesting thing about Australia is two things there.

54:13Tom McPhail:They've completely means-tested their state pension, right? So if you have lots of private savings, you get no state pension at all. And they've got a problem with people getting retirement with defined contribution. They've got a pot of money that they've saved up. And people are underspending it in retirement. They're too cautious about how they consume those retirement savings. So you've got people with poorer standards of living than actually they could have because they don't know how to draw down effectively on their retirement savings. So that's become a bit of a problem in Australia. But in terms of the structure of the industry, I think they're sort of 10, 20 years ahead of us.

54:46Tom McPhail:And I think there's some lessons we can learn from them. Simplification then is, like, if we're talking about ways to increase the total value of the pot over time without just pouring more money in, which is a hard message, simplification is one through reduction of fees. Because fees are corrosive to the long-term value. Yes, they are. So we need economic growth. We need investment returns. We need lower fees. We need simpler structure. We need to strip the admin out. So, you know, and if you've got fewer, bigger, better-run pension schemes, it should produce better value for all concerned. I do fear, though, like, I think it was which police department in America had loads of money in FTX.

55:23Do you know these kind of – I mean, I know they're horror stories, but I just –

55:27Tom McPhail:Yeah, well, the Enron pension scheme, the staff had most of their money in Enron shares. Oh, wow. So that didn't go so well. So there is that. So, yeah, which is why, you know, the trusteeship, the guardianship of the money, how that money, the custodianship, how that money is looked after is really, really important. You need people who can take a long-term view solely with a member's best interests in mind. Okay. So can we focus a little bit on the individual now as in someone listening to this conversation who goes, okay, time to get serious. What are the practical steps that they can do tomorrow or in the next few years to improve their outlook?

56:06Tom McPhail:A couple of really simple things. If you're not in your workplace pension already, join it, right? Because it's free money. You put in 4 % of your pay as a minimum. Your employer will put in 3 % for you. The government will top that up with at least 1%. So you've doubled your money. You've put in 4%, other people have put in 4%. There is no other investment you can get that doubles your money on day one. And yes, I know you're not going to get it back for decades, but - You will get old. You will get old. Most of us will, hopefully. Yeah, chances are pretty high that you get older than the die young.

56:36Exactly.

56:37Tom McPhail:So you're going to need that money one day. So join your workplace pension. But also look at the terms of the workplace pension. And we'll come back to the self-employed again in a minute. But within the terms of the workplace pension, quite often employers, particularly larger employers, will say, look, I'll tell you what. So the minimum is 4 and 4, effectively, or 4 % and 3%. But I'll tell you what. If you put your contribution up to 5 % or 6%, we'll put an extra 2 % or 4 % in. So they'll match or double match what you put in on top of the minimum. So take a look at that because it may be that if you put in 5%, you'll get 6 % from your employer.

57:13Right near the 15 then.

57:15Tom McPhail:Right, right. All of a sudden things are looking good. If you put in 8 % and your employer puts in 8 % as well, boom, okay, now we're doing enough. So look at the terms your employer will offer you.

57:27Tom McPhail:And some of them will do a thing called salary sacrifice where instead of paying you the money and then you put the money in, they pay it in and avoid national insurance costs. And so it becomes a 100 % employer contribution. That saves you national insurance. So there's some dodges there. For the self-employed, it's not as simple because there is no employer. But I would come back to that, make a plan. I'm not prescriptive of whether it's a pension or a lifetime ISA if you're under the age of 40 or a conventional ISA or investing in property. Just do something, right? and you know as a rule of thumb if cumulatively you're not putting aside for the long term at least 10 % of your income every month you're probably not saving enough but another thing that everybody can do is go online there's lots of useful calculators online the money and pension service have one but there's lots of commercial calculators available as well and in five minutes less you can plug in your age when you're hoping to retire how much you're earning how much you're saving already.

58:25Tom McPhail:And it will spit out some numbers and say, right, this is what your future looks like. Another thing you can do is look at the pensions and lifetime savings associations, retirement living standards. So there's a website, PLSA, search for that, you'll find it, where they put in, this is what a minimum retirement looks like, this is what a moderate retirement looks like, and what a comfortable retirement looks like. It's like a two-week holiday in Europe. Exactly. So they've worked out roughly how much you need to live on in today's money. So if you've done the calculator and then you look at the PLSA numbers, then you can start to build a picture of what your long-term future looks like.

59:00Tom McPhail:And then you can start to build a plan. And the good news is none of this is actually that painful. If you sit down on a wet afternoon with an hour in front of a computer in an hour's time, you will have at least got something that looks like a plan for what your retirement savings look like. And I know a lot of people put it off because it looks scary and complicated and boring. And there's always something better to do. Go and do some weeding, whatever, but actually quite quickly, quite quickly, so I'm from the country. So quite quickly, you know, you can actually get on top of it. And, you know, I can speak from personal experience, the simple act of getting to that point of understanding, framing the equation and understanding what the parameters of the equation are just feels a whole lot better than not knowing.

59:43Tom McPhail:So quite quickly you can get on control of it. The PSLA, the guidelines that you say, they're obviously in today's money. and someone like me and Tia, you know, maybe even yourself. I don't know how old you are. Sorry. I'm guessing a bit older than you guys. I don't know. I don't know. You never know. Black don't crack. Black don't crack. I don't know about this guy, but yeah. White looks shite. Yeah. So 20, 30 years out, inflation becomes a big consideration. How would you advise someone to take a figure today and to extrapolate that out to say 30 years time? The easiest thing is to use the calculators because they can do that for you.

1:00:20Tom McPhail:The inflation calculators. So some of the pension projection calculators will factor in inflation for you so they can give you results back in two days' money. You can use an inflation calculator. Again, Google it, you'll find one. It's pretty simple. So it's not hard to get answers to that. So you can sit down with a piece of paper and try and do it manually if you want. The numbers are scary, though. Yes, they are. So today, 30K, say, would be about 70 by the time I retire are 2 % to 3 % inflation. So 70 times by 25, 3.5 million or something like this? Yeah, yeah, yeah. In retirement savings.

1:00:55I always sit here all the time going, you're going to need millions in retirement if you're my age to have a good standard of living. And people always go, oh, no, I won't.

1:01:01Tom McPhail:But then the investment growth should offset the effect of that. And wage growth, hopefully. Typically, wage and investment growth run slightly ahead of inflation. So that brings it all back down into manageable numbers again. So yes, in nominal terms, that pot of money suddenly looks huge. but actually when you get there it won't look quite so big. I mean, I'm old enough to remember when a million pounds was actually a lot of money. So, yeah, things can snap back. And it's about the investment growth and the wage growth that will offset the inflation. So I just wanted to set that up so that when people sit down in their 20s and look and they realise they need 50 million quid, they're going to be like, oh my God.

1:01:38It's okay, you can get there, right? You're going to buy a Mars bar with that, so don't worry about it.

1:01:44Tom McPhail:Yeah, no, the pension calculator will roll up your wage growth and your investment returns, and that will bring it all back into perspective for you. Okay, let's flip this another side then. So I have probably a savings problem in terms of I probably save too much. And one thing that concerns me is that I'll get to the end of the journey, be sat on millions, and I'll be like, I just wasted the best years of my life. What, you're doing this? Yeah, yeah. No, I mean, this is great. I love this. but what you know like living and you could be in vegas how much yeah yeah so so i mean again i think that's where running calculations helps because it helps you quantify the equation and if you're saving 30 of your pay which i suspect most people aren't then you might look at that and say do you know what i might be over saving a bit here right so so that might help a bit for most people the problem is under saving right but then the other interesting elements of that equation is when you get to your 60s, roughly, the really difficult thing that is still not solved is, okay, so what is the safe rate of income withdrawal now?

1:02:49Tom McPhail:I've stopped working at whatever age, so now I'm just living off my savings and my state pension, and how fast can I consume that money? What does sustainable look like? Do I want to leave any money for my kids? How do I build in some wriggle room in case I need later life care or go into a care home, which is ruinously expensive. Working out a plan to manage all of that, I mean, that's a whole separate podcast in its own right, but that's a challenge too. So what do you think of the Trinity Study 4 % rule then? Do you think that's too simple? It's a good starting point. Not everyone who's listening knows what the Trinity Study 4 % rule is.

1:03:24I do, obviously.

1:03:27Tom McPhail:So the basic assumption is you draw 4 % of whatever capital you've got a year and it will see you through. So if you start with£100 ,000 and you draw£4 ,000 a year, you probably won't run out of money, is kind of crudely what you do. It gets more complicated than that because as you get older, you want more security. So let's say that£100 ,000 is still invested. Well, it might go down as well as up and you want to be able to sleep at night. And maybe at some point you want to swap that capital for a guaranteed income for the rest of your life by buying an annuity, which is what it does. You hand over the capital and in return you get a guaranteed income for life.

1:04:01Tom McPhail:But in the process, you've lost your capital and maybe you wanted to leave some of that money to your kids. So there's trade-offs with all of this kind of stuff between security and flexibility and higher levels of income versus continued ownership of capital. None of this is easy. I mean, I would say for most people, getting a financial advisor to help you work your way through that, to navigate those challenges is the best answer if you can afford it, if you can feel it's worth the money. because financial advisors don't come cheap either. But genuinely, it is a complicated challenge when you get to that end of life.

1:04:38There's also the point of you probably want to be spending more in your early retirement, then it dips, and then you go back up again. So 4 % assumes flat, which means you don't enjoy your 60s going and seeing the world or whatever.

1:04:49Tom McPhail:Yeah, absolutely. And I think for a lot of people in their early phase of retirement, that's when you want to be blowing the money, going on the trips of a lifetime. Yeah. normally this is where we'd say this isn't financial advice and it really isn't but if you want to speak to a good financial advisor then we might be able to help we've partnered with a few advisors to offer a range of services from one-off flat fee guidance to ongoing advice i'm actually using the guidance service to sort out my finances if you'd like to understand your options there's a link in the description where you can answer a few questions and then book a free call with my colleague will so you can figure out what might be right for you this episode was produced by Ruth Edwards and it was filmed and edited by Ben and Jack at Flow Spire.

1:05:31See you next week.