Your IndustryJul 7 2016

How workplace pensions have changed

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How workplace pensions have changed

Workplace pensions have been given a filip by the launch of auto-enrolment (AE) and a concerted push by government and industry to educate Britain about the benefits of pension savings.

Regardless of repeated government tinkering to pensions taxation - and the possible cloud on the horizon shaped like a pensions Isa - workplace pensions have seen their status improve over the past decade, according to respondents to this guide.

The main reason for this improvement is auto-enrolment (AE), which was brought into being in October 2012 and has so far added millions more people into an employer-sponsored pension scheme.

According to Tim Gosling, policy lead for defined contribution (DC) at the Pensions and Lifetime Savings Association (PLSA), AE has been a “huge success”.

He says: “AE is helping people to save for a better income in retirement. Figures from the Department for Work & Pensions (DWP) show there has been a significant increase in the number of savers since its introduction, from 3.2m to 13.9m.

Auto-enrolment is reversing the downward trend of workplace pension provision Gavin Perera-Betts

“This has bucked the dramatic downward trend in pension participation seen between 2004 and 2012, of 63 per cent.”

Gavin Perera-Betts, executive director of product and marketing for the National Employment Savings Trust (Nest), agrees: “The government harnessed behavioural economics and built a policy which went with the grain of people’s natural inertia.

“In doing so, they changed the default savings behaviour from ‘out’ to ‘in’.

“Now in its fourth year, with approximately 6m more people saving for their retirement, auto-enrolment is reversing the downward trend of workplace pension provision.”

Figures cited by Mr Perera-Betts were from the 2015 DWP document ‘Workplace pension participation and savings trends: 2004-2014’, which revealed how there had been 11.9m eligible employees participating in a pension in 2004, dropping to a low of 55 per cent, 10.7m, by 2012.

Once implementation is completed in 2018, the government expects 9m more people to be newly saving, or saving more, into a pension, as a result of AE.

Mike Morrison, head of platform technical for AJ Bell, comments: “After the damp squib that was stakeholder pensions, auto-enrolment has undoubtedly improved the status of workplace pensions.

“AE, with the need to opt out seems to have made sense, and worked on sound ‘inertia’ principles.”

Downsides

As a result of AE, more people have been put into a pension scheme and this has started to “make a difference” to the number of people saving in the UK, says Kate Smith, head of pensions at Aegon.

She adds: “Admittedly most auto-enrolled workers are paying contributions close to the legislative minimum, at 1 per cent of a band of earnings with an additional 1 per cent from their employer, but it’s a start.

“Even when this rises to a total of 8 per cent, it is not going to be enough to give most people an adequate income in retirement.”

This is a huge problem - despite higher costs on employers and higher cuts out of people’s salaries, 8 per cent will not do much to bridge the yawning pensions gap.

Indeed, as these costs bit into the monthly pay slips of individuals, the ‘inertia’ effect might start to dwindle as people look for ways to reduce their monthly outgoings.

While the government has now put quality standards in place for schemes, including a 75 per cent charge cap on default funds, and there is now a greater choice of potential pension schemes, Ms Smith worries not enough has been done to increase people’s confidence in pensions.

She explains: “One area which needs to be looked at urgently is the sustainability of master trusts.

“There are more than 70 master trusts in the UK, hoping to benefit from auto-enrolment, of all shapes and sizes. Some are regulated by the Financial Conduct Authority, others are not.

“There is a concern not all master trusts will prove to be viable, and there is also concern over a lack of member protection should a master trust be wound up.”

Ms Smith anticipates more government changes to be put into place in a future Pensions Bill, which would set out new sustainability and governance standards for master trusts this Autumn.