Written by Marek Handzel
Some choppy waters need to be navigated, but many believe that the UK government is about to set the country back on the right course when it comes to retirement saving, finds Marek Handzel
The British Navy was, like its private sector pensions system, once the envy of the world.
Both are still respected, but underfunding, events out of their control, and constant tinkering have left them hankering for the good old days.
Their futures, however, look to be heading in two very different directions. The chances of the navy ever recapturing its former glories look remote, whereas private pension saving could be on the cusp of a major revival.
Two factors are raising hopes of a renewed pensions landscape in the UK. The first is auto-enrolment, introduced by the previous Labour administration, and the second is the coalition government’s Pensions Bill, currently being debated in parliament and expected to become law by the spring of 2014.
“The work governments have done over the past 10 years has put us in a much better place overall,” says Fidelity head of proposition, DC and workplace savings Richard Parkin.
For Parkin, three areas have been addressed in that time: encouraging workers to take more responsibility for their retirement; taking away the barriers that prevent people from doing that; and making sure that their pension saving is beneficial to their overall financial circumstances.
The first of these challenges is being tackled with auto-enrolment.
“[It] has been great,” says Parkin. “Not just because it gets a whole bunch of people who weren’t into saving into it, but we’ve finally got away from saying we’ll get the existing market to provide pensions products to those on low earnings.”
Nest, the national pension scheme set up by the government as a low cost plan to aid auto-enrolment’s success, has changed the infrastructure around pensions in the UK. It has spawned some commercial imitators, most notably NOW: Pensions from Denmark, and has already had some large employers placing some of their staff onto its books, including McDonalds and BT.
What’s more, Nest’s creation has allowed the government to propose banning companies from passing consultancy charges onto savers The change, included in the Pensions Bill, will mean that employers looking to save on costs will be able to enrol staff into a ready-made and perfectly adequate scheme, without having to shop around.
Crucially, the ban will also send a much needed positive signal to the general public about pension saving, whose image has been heavily tarnished in recent years by talk of excessive charges on pension products.
The hope is that the measure will also reassure prospective savers and keep opt-out rates at the current low level of between 2-5 per cent that many employers are reporting.
The Pensions Management Institute (PMI) chief executive Vince Linnane believes that auto-enrolment could “change people’s mindsets” when it comes to pensions.
“It’s a vital step in the right direction,” he says, “by getting people to understand that they cannot just rely on the state.”
No longer a right state
Workers will however soon be able to count on one thing with the state: a simplified state pension.
The Pensions Bill is set to introduce a single-tier, flat-rate state pension from 6 April 2016, stripping away much of the tricky means-testing that has bewildered those who have struggled to work out if saving into a pension is actually worth it.
“One of the UK’s biggest problems for a long while was the complexity of the state pension and means-testing,” says the National Association of Pension Funds (NAPF) head of research Mel Duffield.
The government claims that the new pension will result in an additional 800,000 households benefitting from a higher retirement income. But the knock-on effect on defined benefit (DB) schemes will be significant too, says specialist pensions law firm Sackers associate Georgina Beechinor.
The single-tier pension will end the earnings-related component of the state benefit and employees in DB schemes have been encouraged to contract out of this second part of the state pension, resulting in lower National Insurance contributions for both employee and employer. This ability to opt out will end in 2017.
“Schemes will need to take certain steps to amend their rules to accommodate these changes,” says Beechinor, whose firm is also part of the global HR advice alliance Ius Laboris. “But in the long term, the abolition of contracting out should make [DB] schemes simpler to administer and make the benefits provided easier for employers and members to understand.”
As elsewhere in Europe, the state pension age will rise too, giving government some fiscal breathing space, and workers more time to save.
“Quickening the pace of the rise in state pension age also recognises the fact - which has been obvious for quite a while - that keeping it at 65 is untenable with people now living on average into their 80s,” says Linnane.
Not all smooth sailing
For all the government’s good work, there are still areas of contention.
One of those is the suggestion that small pension pots worth less than £10,000 will move with an employee when they change jobs.
Beechinor says that the general idea is a positive one, given that so many people forget about their pension savings, particularly in the early part of their working lives as they move from one scheme to another, but believes that the ‘pot-following-member’ strategy is the wrong one.
“We believe that the use of an aggregator scheme is more helpful,” she says.
The NAPF is concerned too. “[We’re] worried about what safeguards there are stopping members from going into high charging or worse performing schemes.” says Duffield.
The austerity programme the government is following does not help matters either. As Linnane points out, the Treasury’s desire to squeeze revenue from pension tax rebates means that the public is fed contradictory messages.
For example, he says, ministers stress the importance of people assuming greater control over their own retirement savings to make auto-enrolment work, while at the same time “penalising those who attempt to do that – albeit at a generally higher income level – by reducing the annual allowance limit to £40,000 in 2014”.
And although opt-out rates under auto-enrolment have been very low, the perennial problem of inadequate contribution levels in DC schemes remains.
The right man at the helm
Despite such difficulties, the UK couldn’t have a better man to navigate around them. Steve Webb, the Pensions Minister, is a highly respected politician who is genuinely committed to his brief and seeing the pensions industry flourish.
“Having a guy like Steve Webb in charge of pensions for as long as he has been and someone who is so engaged, has made a huge difference,” says Parkin.
“He has been around in the pensions sphere for a very long time, he’s clearly got a lot of influence in the coalition to get things done, and he’s doing the right thing.”
One of those ‘rights things’ is looking at shared-risk, or hybrid schemes again, which Webb has labelled ‘defined ambition’ schemes.
“Given the expectation that minimum contribution levels DC schemes for auto-enrolment purposes are unlikely to provide sufficient income in retirement, it makes sense that the current government is seeing what measures can be taken to ensure that individuals end up with decent pension provision,” says Beechinor.
Duffield is of the same opinion, saying that the abolishment of contracting out may actually push destabilised DB schemes into a hybrid model, assuming that employers will have an appetite for some risk retention. She says that new regulation would need to be put in place to make hybrids more appealing to employers, however.
All hands on deck
But the government cannot do everything on its own. As Linnane says, the pensions industry is still too focused on itself at times, rather than the savers they are targeting.
“As an industry, we need to make retirement savings products more flexible, accessible and transparent,” he says. By working together with government, he predicts, the pensions landscape will be in better shape.
Marek Handzel is a freelance journalist