LONDON (4 April 2016) – Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said a recent poll of pensions professionals indicated that most believe introducing the new Lifetime ISA (LISA) will not have a negative impact on the take-up of their company sponsored pension schemes.
Following the Chancellor’s Budget announcement of the LISA to encourage saving by young people, industry professionals had expressed concern that it may affect employee contributions to company-sponsored pension schemes, as employees could choose instead to contribute to a LISA, rather than to a pension.
In a recent post-Budget Aon Hewitt webinar, over 600 pension professionals were asked their views on the implications of the announcements.
Over half (58%) of the respondents thought that the introduction of LISA would not have a material impact on the opt-out rates of younger employees in company-sponsored schemes. Only 2% of the respondents thought that LISA would have a significant impact, while 38% of the respondents thought that the impact would be modest.
Most respondents representing employers (44%) indicated that they do not plan to make any specific changes to their benefit packages following the introduction of LISA, while 25% said they would facilitate the introduction of LISA in their benefit packages (e.g. by adding it as an option under a flexible benefits package) and only 8% said they would actively engage with it – for example by offering a choice between pension and LISA with support on design and selection.
Kevin Wesbroom, senior partner at Aon Hewitt, said:
“We welcome the introduction of LISA as a means of encouraging younger people to save for the future. We do think the pensions industry needs to take time to think about how to encourage younger employees to get into the savings habit early - rather than insisting that a pension is the only vehicle of choice. There are now multiple saving mechanisms that can contribute to retirement saving and a combined approach may be right for different segments – the young and high paid may well both latch onto the ISA/LISA route - in addition to pensions. However, we accept that the LISA may not be the right choice for everyone and for some young people this new system could be a distraction that could lead to millennials being left with insufficient savings in later life.”
Impact on auto-enrolment
Debbie Falvey, DC Proposition Leader, Aon Employee Benefits added:
“The introduction of the LISA could be problematic for employers. Some have already pledged to add the LISA to their recruitment benefit packages, but other employers are more wary and say this is a personal choice outside the workplace.
“Choosing to invest in a LISA rather than a pension is an additional choice that some employees will benefit from – for example, if this genuinely gives them the boost towards a house purchase or brings them earlier into saving than might have been the case. However, many could end up worse off if they make the wrong choice on where to invest their money. Many employers offer generous contributions under their pension schemes and are currently unlikely to offer similar compensation under an alternative LISA. Investment strategies will also have significant differences, since any default investment would ultimately target the expectation of whether an individual’s goal is for long-term saving versus short-term cash withdrawal.
“Employers will want reassurance that facilitating access to LISA will not fall foul of the auto-enrolment legislation, specifically around inducing employees out of the pension scheme. As things stand today, a LISA would not be a qualifying pension scheme for the purposes of auto-enrolment.
Debbie Falvey continued:
“It would be a bold movement by the Government to allow employee (or even employer) contributions to a LISA to satisfy the auto-enrolment obligations. Pension schemes are heavily regulated and only become qualifying pension schemes because they meet specific requirements, for example around governance, charging structures and investment choices. The LISA, as part of the ISA product suite, does not have these requirements, and the long term impact of ‘pension savings‘ being withdrawn for house purchase are unknown and could well undermine the success of auto-enrolment.
“As a half-way house – employee contributions to LISA, employer contributions to pensions – could be a dramatic re-shaping that would please many different demographics in the workplace. But then thought needs to be given on how these two very different tax vehicles are combined at retirement to avoid any duplication of tax.”
During the webinar, attendees were also asked whether they thought that the introduction of the LISA was paving the way towards a full TEE (Tax Exempt Exempt) system. 56% of the respondents agreed that this was the start of a move towards a fully blown TEE system while only 21% thought this was not the case.
Kevin Wesbroom said:
“The Government has implemented substantial changes to the pensions system in the past few years and both employers and employees are still working through the implications. While the Government might argue that it complied with the pre-Budget announcement that there would be no major changes to the pensions system, it is clear to most in the industry that the LISA could be the precursor to a full blown TEE system.
“We need to make sure that any future changes do not alienate employers from their crucial role of supporting employees in saving for their retirement.”
Notes to Editors
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