Articles - DWP Report: Reinvigorating Workplace Pensions

 Key findings in "Reinvigorating Workplace Pensions" include:

 Defining ambition for pensions

 Defined Ambition (DA) has been put forward by Steve Webb as a way of bridging a perceived gap between the two main pension saving models in the UK - Defined Benefit (DB) and Defined Contribution (DC). In a DB pension, investment risk rests with the employer, with DC, the individual takes responsibility for their savings level and risk profile.

 With a DA pension, risks are shared, offering greater certainty to savers about the final value of their pension pot than in DC, and less cost volatility for employers than in DB. While examples of these types of pensions already exist, such as career average or cash balance schemes, the Government wants to see how it can encourage and incentivise the industry to develop other more innovative products and bring more of them to market.

 A number of potential new models for "Defined Ambition" pensions are outlined in the Government's paper, examples include:

 ♦ Conversion of benefits - where the employer promises a defined level of benefit, and when the member leaves the scheme by retiring or leaving the employment, the benefit is converted to a cash lump sum of an equivalent value - either to purchase a retirement income, or transfer toa DC scheme.
 ♦ Moneyback guarantees - where a guarantee ensures a saver gets back at least what they put in could encourage more people to remain in a pension and save for their old age. One way of doing this would be to have a moneyback guarantee funded by a levy on members' funds. While an employer might opt to pay the levy for an individual, it is likely the payment would be made by the member, relative to their funds. The cost could be kept down if this were a mutualised fund guarantee - i.e. provided not-for-profit by the private sector, or a government-sponsored but industry-funded body, similar to the Pension Protection Fund.

 Keeping charges in check

 The introduction of automatic enrolment makes ensuring schemes have both clear and value-for-money charges all the more important.

 As smaller organisations come on stream over the next five years, the Government will monitor charges regularly across the pensions industry and the Minister reserves the power to cap charges if such action becomes necessary.

 The Government is also exploring the idea of a "star rating" system for pension schemes with the industry. It is important that employers recognise and choose quality schemes and that employees value that provision. This could include charges, good governance and transparency.

 Quality and value through scale

 The Government is also keen to work with the pensions industry to look at whether a pensions market with a smaller number of larger scale, multi-employer pension schemes might offer both employers and employees value for money.

 Countries like Australia have collective occupational pension funds, not employer-sponsored schemes. While smaller schemes are still going to offer value in certain circumstances, larger schemes tend to bring higher levels of governance activity.

 This paper outlines the possible benefits of scale and thoughts on how to bring it about. In Australia, for instance, trustees are also required to consider whether members are being disadvantaged by a lack of scale.

 Escalating pension contributions

 Research shows that the level of contributions someone makes into a pension is the most significant factor influencing income in retirement when saving into a DC scheme. Under automatic enrolment, the minimum level of contributions will be 8% of gross earnings, in a band between £5,564 and £42,475 - with 4% from the individual, 3% from the employer and 1% in tax relief from the Government, by the time the programme is fully up and running in 2018.

 For many people, however, saving the minimum amount will not be enough to give them the level of income they would like to achieve in retirement. One way of encouraging people to go beyond the statutory minimum, where it is appropriate for them to do so, is by using automatic escalation. As with automatic enrolment, an individual no longer has to take an active role once they have signed up and decisions to increase saving happen automatically when they get a pay rise.

 Clearer annuities

 People are advised to shop around to secure the best annuity rate, as this will determine their retirement income for life. To do this, they need transparent information, and the ABI has launched a compulsory code of conduct. The paper also outlines alternatives to lifetime annuities and encourages work to explore more flexible ways for people to use their pension pot to best meet their income needs in retirement.

 Foreword by the Minister of State for Pensions, Steve Webb

 2012 has been a major milestone in the development of the UK’s pension system. It has seen the introduction of automatic enrolment into workplace pensions, a reform which will result in millions more people saving privately for their retirement. It has also seen the confirmation of our intention to fundamentally reform the State Pension. Single-tier reforms will deliver a simpler State Pension, set above the basic level of means-tested support, helping to ensure that those of working age will be able to save for their retirement with confidence. We will be publishing more details on our plans for the single-tier pension shortly.

 Building on these two elements, it is critical that we ensure that people saving privately are doing so into high quality, value for money schemes. It is no secret that people have less confidence in pensions than they used to. But for many people pensions remain the best way of saving for retirement and such savings are crucial if people are to have the level of income in retirement they say they want. We need to restore confidence in the system: so people don’t choose to optout of automatic enrolment; so people put enough in; so people get the most out of what they put in; so the pensions market provides a good range of products that meets the needs of savers and employers.

 This strategy sets out the key elements needed for a future private pensions system that delivers good outcomes for those who save. It does not have all the answers – confidence will not be restored overnight and we will need to work with the industry, employers and consumers to build on the foundations outlined here. We are clear that we have more to do in a number of areas. We need the right regulatory framework for Defined Contribution schemes to ensure high quality and well-governed schemes without restricting innovation. We need to ensure charges are appropriate and transparent. We need savers to be supported with clear and understandable information throughout the pensions lifecycle and particularly at critical periods, such as on the approach to retirement. And as automatic enrolment settles down, we’ll need to think about how we might encourage people to save more than the statutory minimum.

 Looking at issues through the lens of the consumer can provide us with powerful insights for improvements. For example, one thing we know people value in pensions is certainty and I am keen to increase the range of products available to savers in order to give them this. Our work on ‘Defined Ambition’ pensions is a key part of establishing a future pension landscape that meets consumer needs,rebuilds confidence in the system and ensures good outcomes in retirement.  

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