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Home > Pensions > Personal Pensions

By Julia Bradshaw | Published May 09, 2012

Contributions of 8% not likely to be sufficient: PPI

In a 16-page submission to the work and pensions select committee on governance and best practice in workplace pensions, Niki Cleal, director of the PPI, said contributions would need to rise to at least 15 per cent from the current 8 per cent minimum if people were to achieve an adequate level of income in retirement.

Research carried out by the PPI showed that if a median-earning man or his employer were to increase the contributions from 8 per cent to 12 per cent, his private pension income could increase by 50 per cent.

Ms Cleal said: “A key risk to the outcomes for members of defined contribution schemes following auto-enrolment is that a combined contribution rate of 8 per cent is unlikely to be sufficient for most individuals

“Even on top of state pensions, combined contributions of closer to 15 per cent of band salary are likely to be needed. Policymakers will need to consider ways to encourage both individuals and employers to contribute more.”

She also highlighted the importance of good investment returns in DC schemes will increase the need for closer scrutiny on how they are governed.

Ms Cleal added: “Some concern has been expressed that in a contract-based group personal pension scheme there is no one explicitly representing the interests of the scheme member. This may point to the need for tighter regulation of contract-based schemes, than for trust-based DC schemes. “

Her comments echoed the views of Australian senator Nick Sherry, who has been at the forefront of the country’s workplace pension reform.

In Australia, auto-enrolment, or superannuation, has been running for more than 25 years and minimum contribution levels are rising to at least 12 per cent.

DC schemes and trustees are also closely scrutinised by the financial regulator, which has a specific remit for superannuation.

Trustees must be licensed, are individually liable for their decisions and must justify administration, provider selection and other forms of service.

Mr Sherry said: “The government and regulators in Australia now have much closer scrutiny over trustees because they are central to outcomes. Trustees are not just socially responsible to the members, but also are investing billions of pounds.

“This is a powerful economic tool and the consequence is the government wants to make sure trustees optimise the investment. This will happen in the UK too.”

Christopher Wicks, director of Cheshire-based Bridgewater Financial Services, said: “Auto-enrolment will raise the profile and benefits of pensions and if employers introduce it now, rather than waiting for their staging dates, it can be done painlessly with a gradual increase in contributions.”

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