Default auto-escalation is the key to getting pension contribution rates over 8 per cent, the pensions minister said, adding that compulsion to pay into a pension “is not the answer”.
Speaking at the National Association of Pensions Funds’ annual conference, the minister for pensions Steve Webb said that in principle “default auto-escalation is probably the best answer to the problem that 8 per cent is not enough”.
From 1 October 2018, the total minimum contribution for auto-enrolment will be 8 per cent, including employer contributions.
Mr Webb explained that the theory to default auto-escalation would be for the person to go into an auto-enrolled scheme at 8 per cent, and at each pay rise a part of your pay would go towards their pension.
Mr Webb added: “Yes we have to get everybody in and we have to get everybody up.”
The Office for National Statistics’s occupational pension schemes survey for 2013 revealed that total average contributions were now 9.1 per cent, compared to 9.7 per cent the previous year.
Contribution rates to defined benefit schemes, excluding deficit reduction payments, remained higher than for defined contribution schemes.
Mr Webb also said that the biggest group that opt-out are those who are old or older workers, but that he expected the new freedoms to boost staying in rates for these groups of people.
Mr Webb also said he believed collective defined contribution schemes have a future in this country.
In June, the government gave the go-ahead for CDC schemes based on risk-pooling models to be legislated despite industry criticism.
Under the CDC model, contributions are not retained in an individual fund for each member but are pooled. When a member retires the income is paid from the asset pool rather than through the selection of an individual retirement income product.
Ministers believe that pooling money in this way will help increase the retirement incomes of some workers up to 30 per cent.
Mr Webb said: “I believe CDC has a future in this country. We are starting to see individual schemes offering CDC options.”
“One of the lasting legacies of this government will be CDC.”
However, Hargreaves Lansdown and Partnership previously told FTAdviser that CDC schemes could be viewed as an “inter-generational ‘Ponzi’ scheme”.
Jim Boyd, director of corporate affairs at Partnership, said that while pooling the investment in one fund risk does bring down overheads, but it also involves transferring risk from the old to the young, with the younger members bearing the risk of potentially reduced future payouts to ensure the benefits of older members are preserved.
He said: “From one perspective CDC can be seen as a with-profits fund, however young people might be forgiven for viewing CDC as an inter-generational ‘Ponzi’ scheme.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, previously told FTAdviser: “The nature of ‘with profits’, the issue around ‘cross-subsidy’... if you have a conveyor belt of new members you can achieve stability potentially.
“But there is a risk, as we have seen in Holland, that if the actuaries get their sums wrong, there is a potential situation where we are running at a deficit and the problem is that new members may have to fill the deficit that exists.”
Unwinding of annuities was also raised by Mr Webb at the conference, who said he did not expect the government will change anything for people who have been locked into an annuity before the pension reforms come into effect in April 2015.
However, Mr Webb did say he would he would consider this as part of his own election pledge.
Elsewhere, Mr Webb said that the current structure of tax relief will not hold. He said: “I think tax relief should be flat rate. Higher than current basic rate, lower than current higher rate.”
He also mentioned that the Department for Work and Pensions is set to publish a command paper, setting out its plans for the implementation of the charge cap on auto-enrolment workplace pensions.
ruth.gillbe@ft.com
Additional reporting by Donia O’Loughlin
