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What more is needed to boost workplace pensions?

This article is part of
Guide to workplace pensions

What more is needed to boost workplace pensions?

With the demise of gold-plated defined benefit schemes and the rising state pension age, younger clients in particular will need to save far more and from as early on as possible to secure a comfortable retirement.

Getting people engaged with workplace pensions - particularly where the employer matches or doubles the contribution - is widely seen as a starting-point in conversations about pension planning.

According to Mike Morrison, head of platform technical for AJ Bell, “we need to make sure people understand how much they will have to contribute in order to get a realistic income. The current low level of contribution will have to increase radically.”

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With regard to auto-enrolment, the government has already acknowledged contribution rates will need to rise past the statutory 8 per cent.

In the May 2016 House of Commons Work and Pensions Committee (WPC) report: Automatic Enrolment, 11th Report of Session 2015-16, the committee called on the government to make sure its 2017 review needed to consider ways to boost people’s workplace savings.

According to the report: “The review should consider how to increase contributions beyond the statutory 8 per cent and how to bring more low-paid and self-employed people into AE.”

Regulation

AJ Bell’s Mike Morrison adds: “It is important to make sure the regulatory regime around auto-enrolment is sufficient to maintain good governance and transparency of charges. We cannot afford any new pension scandals.

“It could also do damage to the auto-enrolment pension provision of the future if we cloud the matter with workplace Isas.”

This was also the view of the Work and Pensions Committee, whose report commented: “AE is on schedule to have a transformative effect on private pension saving, but is now at a crucial and risky stage of its development.

“It is imperative it is not undermined by other government-sponsored forms of saving.”

Master trusts

Another regulatory hiccup on the horizon is the potential problem of master trusts, many of which are not regulated. There are 72 currently open, the WPC comments, and while generally these are a good fit with the aims of AE, the Pensions Regulator has warned of the risks posed by poorly-run master trusts.

In 2014, the regulator published a master trust assurance framework to ensure adequate standards of governance and administration, but it has no power to compel trusts to meet these standards.

The pensions minister is calling for a Pensions Bill this Autumn to introduce stronger regulation of master trusts.

Chris Daems, director of Cervello Financial Planning, comments: “The way regulation is communicated is fundamentally important.

“Better communications, combined with more support for employers, will contribute to more engagement.”

Communication

“The quality of communication and financial education can be a real differentiator between schemes”, says Dale Critchley, policy manager for Aviva.

He explains: “Employees who understand the benefit they are offered are more likely to appreciate the investment being made by their employers. The result is a return on investment in excess of simple compliance with the law.”