FTAdviser.com

Advertising

This year marks the 100th anniversary of the payment of the first state pension. Introduced by the government of the time in response to rising concerns about poverty in old age, the state pension was part of a package of reforms to help the most vulnerable in society.

The ageing baby boom generation, increasing life expectancy, seriously declining workplace pension participation and falling birth rates mean that, in the future, millions of people will face inadequate pensions in retirement.

The government estimates that over 7m people are currently not saving enough to achieve a reasonable income in retirement. So, 100 years on from the first pension reforms, the UK again faces a significant challenge to introduce reforms to enable people to have a reasonable income in retirement - particularly those who are on low to moderate earnings during their working life.

In 2002, an independent commission - the Pensions Commission - was set up under the chairmanship of Lord Turner, to review the UK pension system and to make recommendations for change. These recommendations achieved broad cross-party support and wide consensus amongst employer, employee, industry and consumer groups.

The government is therefore implementing an integrated package of reforms to help improve retirement outcomes in the future, based on the Pensions Commission recommendations.

As a result, the Pensions Act 2007 reformed state pension provision and increased the state pension age and the Pensions Act 2008 reformed workplace pension provision. From 2012 there will be a new employer duty whereby employers will be required to automatically enrol employees into a workplace pension and make a minimum contribution. Employees will retain the right to opt out.

The employer and employee contribution, taken together with tax relief, mean that most employees can eventually expect pension contributions of at least 8 per cent of qualifying earnings, thereby encouraging and improving the incentive to save for millions of people.

There is no doubt that these are radical reforms, they are aimed at improving retirement outcomes for millions of people over the next century. Without them, the choices are stark: millions of poorer pensions or an unrealistic tax burden on those in work to support the increasing number of those who have retired.

A key element of the reforms, the Personal Accounts Delivery Authority is charged with delivering the Personal Accounts occupational pension scheme. Some people currently have no access to workplace pension provision, maybe because they do not meet their employer's qualification criteria or because their employer does not currently offer a workplace pension scheme. The Pensions Commission identified a need for a low charge, universally accessible pension scheme for low to median earners who do not have access to good quality pension provision. The Personal Accounts scheme is therefore being introduced alongside existing provision to meet that need.

Personal accounts will have a public service obligation meaning it must accept any employer who wants to use it, in particular for those with employees on low to median earnings. It will be a trust-based scheme run by a not-for-profit trustee corporation with high standards of governance. Low charges are important to ensure that low to moderate earners can participate in a workplace pension and keep as much of their pension savings pot as possible to convert into income at retirement.

Minimising the burden on employers is at the heart of Pada's approach as its success will depend on the participation and support of employers As a result, the Authority has been working with employer advisory bodies, including engagement with the employer community directly through our employer representative committee. This is in addition to meeting other representatives from the industry on a one-to-one basis.

Pada also has a consumer representative committee with whom it talks to regularly. The Authority takes engagement with its stakeholders very seriously and has received invaluable support and advice as it continues to develop the scheme.

Charged with developing and delivering the scheme, Pada wants employers and their advisers to be comfortable with its processes. This means providing information related to employers, employees and third parties so that preparation can be made in good time for the onset of employer duties. IFAs will play a critical role in both helping to explain the wider 2012 reforms, and in ensuring that, for those employers for whom the Personal Accounts scheme is suitable, it is positioned accordingly.

The introduction of the Personal Accounts scheme does not mean that everybody will be automatically enrolled into this pension vehicle. Lots of employers already have pension schemes, and many already contribute more than the minimum employer requirement which will come into force in 2012.

Recent figures from the National Association of Pension Funds found that average contributions into employer sponsored defined contribution pension schemes stood at 11 per cent, of which 7 per cent consisted of voluntary contributions from the employer - more than twice the statutory employer minimum in 2012. We expect these arrangements to continue.

Pada is well aware that it is developing a scheme for the future which will be appropriate to the processes of employers in years to come. Therefore, the Authority envisages that the access of administration functions and the provision of information will generally be through e-channels, which could include the internet, email, SMS, telephone IVR, and future digital platforms.

Furthermore, some paper-based or phone-based processes may be supported for regulatory or inclusion reasons. Therefore a non-digital approach may be used where appropriate.

These reforms, including the creation of personal accounts, will mean that millions more people will have access to a workplace pension scheme into which they will be automatically enrolled. This is a key element of these reforms, many people find making financial decisions about pensions difficult and, without encouragement, often do not make them and can live to regret their indecision. Automatic enrolment will encourage people to make provision for their retirement and not be reliant only on whatever the state safety net can provide. Research from the department of work and pensions has shown that 95 per cent of people will be better off in retirement as a result of saving.

Within the Personal Accounts scheme, the pension saving pot will belong to the individual, so, if their employer chooses to use it, they can contribute to it throughout their working life even if they change jobs regularly or take a career break. Under existing arrangements, seasonal workers, contractors and women who take career breaks do not have the opportunity to build up any private pension saving as many employers require employees to work for a minimum period of time before they are eligible for the company pension.

The Authority's aim is to help facilitate a culture of pension saving among a population that has not previously been engaged and to allow people to take some responsibility for their future. Trust will be at the heart of the Personal Accounts scheme: fair, affordable and sustainable, run in the interests of members. The independent Trustee Corporation set up to run the scheme will make sure of that.

Millions stand to benefit from the successful introduction of the Personal Accounts scheme alone. The scheme is a critical component of the reforms that will fundamentally change the private pensions' landscape. Everyone at Pada is committed to playing a part in ensuring that millions more people can save for a pension and achieve a better outcome in retirement as a result.

Tim Jones is chief executive of the Personal Accounts Delivery Authority