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The Actuary The magazine of the Institute & Faculty of Actuaries

WRIC retirement savings report draws mixed reaction

Lord McFall of Alcluith (pictured), the former Treasury Select Committee chair who led the report, highlighted seven key areas where defined contribution (DC) pension schemes could be improved:

1. Adequacy - the 8% of salary minimum contribution set by the Government's auto-enrolment reforms will not be sufficient for many people. The Government must now start to investigate how the contribution floor can be increased following its review of auto-enrolment in 2017. In the meantime, the Government should work with employers to pilot ways of encouraging people to save more.

2. Charges - first, the Government must ensure good value for money out of auto-enrolment pensions by capping the charges allowed in them. The cap should match the existing limits on stakeholder pensions: 1.5% pa for the first ten years, and 1% thereafter. Failure to do so could leave the Government open to complaints about ‘mis-selling'. Second, the UK is unique in having many small, inefficient pension schemes. New structures need to be developed to allow bigger, low-cost pension schemes to operate.

3. Annuities - the Government and industry must ensure the vast majority of people end up with the best value annuity. Annuities should be more flexible so that they meet changing spending patterns in old age.

4. Risk - the Government must work with the industry to develop new products that help mitigate risk, and employers must be incentivised to take on a share of pension risk.

5. Small Pension Pots - the Government should consider defaulting small pots into places where they can be managed efficiently. This includes NEST, which is currently banned from taking them.

6. Cultural Change - savings products must become more accessible. Employers are scared to offer advice about pensions and must become reengaged through tax incentives and the creation of ‘safe harbours' that allow them to discuss pensions more thoroughly with staff without excessive fear of legal comeback.

7. Stability - a permanent, independent pensions commission should be established to take the politics out of pensions.

The Commission was set up by the National Association of Pension Funds, and its full report - which concludes over five months of investigation, consultation and interviews with consumers - can be found here.

Lord McFall said: "Pensions have become a burning issue. The spotlight for reform has rightly fallen on the public sector, but there are critical problems in the private sector as well. Defined contribution pensions can be very good, but they have to meet the right standards. We need to focus on getting the future right.

"Sadly, millions of people are being left to navigate a pensions minefield that would puzzle Einstein. We're seeing less saving and lower trust in pensions, and that's a vicious cycle that cannot continue. Auto-enrolment will help, but it's a halfway point, not the final answer. More needs to be done. We hope this report will be a catalyst for discussion about the bigger picture."


Association of Consulting Actuaries
Stuart Southall, chairman:

"The report underscores the scale of the pensions dilemma, particularly for employees in the private sector. We need to see wider employer provision and, by and large, much higher contributions into pension arrangements that suit the varying needs of employers, where costs are kept as low as possible and benefits grow as predictably as possible. This is not an easy outcome given the simplification that employers and employees want and need if they are to invest in pensions.

"We remain convinced that trust-based, collective arrangements are the best means to deliver good pensions for the majority of employees. We strongly support the conclusion that (to quote) ‘the Government must show leadership in encouraging and creating an environment in which employers can feel confident and rewarded for taking on risk (pg 63)' - encouraging employers to take on this risk remains the Achilles heel in the Coalition's pension strategy to date. We have a very long way to go before most employers feel they can trust Government and the regulatory paraphernalia sufficiently to invest in pension arrangements so they feel costs can be reliably controlled long into the future. "

"For many employees the squeeze on incomes and higher taxes over the next few years will inevitably mean long-term savings will take a back seat. This may mean higher opt-outs from pensions than we all hope for from 2012 onwards. In the longer term, we would favour higher pension contributions being phased in as the economy is seen to be able to afford a lower general rate of taxation falling on employers and individuals alike. "

Ed Wilson, director, pensions practice:
"The WRIC has provided welcome food for thought on pensions but it does not tackle the challenges in helping people save for their long-term needs.

"Specifically, a hike in contribution rates could arguably give individuals a greater incentive to opt out of pension schemes. The minimum contributions set may already prove too steep for some. Equally, greater contributions for employers could restrict further employment, the last thing UK business needs.

"The focus needs to be on removing the barriers to saving, and not just saving for retirement. The pensions problem is not going to go away, but it is not an immediate problem for most workers. If anything, fears of retirement poverty are making many see the situation seem like a lost cause. From our recent discussions with major UK organisations, it's clear the employers of choice are looking beyond traditional pensions provision to ways they can help staff save more generally and reduce debt. The message should be save for yourself rather than just your pension.

"A cap on pension charges could have some unintended consequences, potentially stifling innovation around scheme design. There's also a risk the cap could simply become the standard charge. What is important is that charges are simple, transparent and fully disclosed."

Barnett Waddingham
Malcolm McLean, consultant:

"It is good that the Commission has recognised the need to simplify pensions and with it the often arcane language that attaches itself to them. The case for good member communication about the workings of their scheme without the use of jargon or other unintelligible language and with upfront transparency about fees and charges can hardly be over-stated as we move increasingly forward into a defined contribution world - the success or otherwise of auto-enrolment/NEST may yet depend upon it.

"It would also help with incentives to save if more employers could be persuaded to offer "better than average" pension schemes to their workers. Despite all the improvements that the present Government has made to pensions in their term of office to date, little if anything has been done to support and encourage good occupational pension provision. One way to do this might be to allow extra tax concessions to private sector employers in those circumstances, financed if necessary, from the savings made from increased contributions planned in the public sector (£1.2 billion in 2012/13) - somewhat of a reversal of the existing cross-subsidies arrangements provided by the general taxpayer."

Confederation of British Industry
Neil Carberry, director for employment:
CBI director for employment Neil Carberry said: "The current plan to introduce a floor of 8% saving from next year remains the best way to ensure more people who can afford to save do so. Further increases in the minimum contribution would put employers and employees under even greater financial pressure, and may drive people away from pension saving altogether."

Association of British Insurers
Maggie Craig, director of life and savings:
"Saving into a DC pension scheme remains the best way to save for the vast majority of people. Employer contributions and tax relief add to the value of the pension pot. Most providers offer charges of less than 1%. This covers the advice and investment expertise needed to make sure people get a decent return on their savings."

"The issues it raises should not be dismissed but are already on the agenda and being actively addressed. The shift to the new pensions world is already underway and it's time to look forward rather than back."

David Craig, author of Pillaged:

"Lord McFall scratches the surface. The problem with the modern pension industry is that the industry wins regardless whether results are poor or not. It makes enough money to fund pensions to the same level or better than our parents, but it has found ways of diverting that money away into their profits. The workable solution is to create performance related pay where no more than 20 per cent of gains may be charged."

Dr Ros Altmann, director-general:

"(Lord McFall) suggests charge caps to ensure lower costs, but that was tried with stakeholder pensions and failed miserably. He suggests people should have an annuities marketplace to get the best price, but annuity problems are about more than just price. He talks about the inadequacy of the current 8% contribution rate proposed for automatic enrolment - but just pushing up that rate will not work if people opt out.

"A major reason that people are not saving in a pension is that pensions have an 'image' problem. There have been so many scandals and disappointments with pensions that people have lost trust in them... Times have changed and the pension system needs a radical image overhaul.

"Lord McFall is right that larger pension schemes should help lower costs overall, but the reality is that charges and risks will remain. Trust has been undermined by too many scandals and savings levels are falling as workers struggle with the costs of everyday living. To make private pensions fit for purpose, we firstly need to radically overhaul state pensions and get rid of mass means-testing and then we need to radically overhaul private pensions, to ensure that they fit with people's lives. Simpler savings products, more flexibility, lower charges and higher contributions would all make an enormous difference. Coupled with radical annuity reform and more exciting products (such as a large lottery prize) we may finally start to rebuild confidence in long-term saving which has been so damaged in the past decade."