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Pension experts have warned that British workers risk a “retirement crisis” unless the Government increases contributions into workplace pension schemes, a measure omitted from Labour’s pensions bill in the King’s Speech.
The government’s pension reform proposals, tabled on Wednesday, stop short of calling for an increase in minimum company and employee contributions to the “auto-enrolment” system, which many industry observers have long said has been insufficient.
The proposals aim to boost retirement benefits for more than 15 million private sector workers and include initiatives such as helping employees understand their pension situation when they change jobs and introducing cost-effectiveness testing for pension plans.
But industry experts stressed the urgent need to increase minimum contributions, which currently stand at 8% of pension payments, with companies having to pay at least 3% and employees 5%.
“This is really important – putting more money into it is a top priority but unfortunately it’s been very slow,” said Steve Webb, a former pensions minister and now a partner at actuarial advisory firm Lane, Clarke & Peacock.
Tom Selby, public policy director at investment website AJ Bell, said that while auto-enrolment had been “successful in increasing the number of people saving for retirement”, the government “needs to address the issue of pension adequacy”.
He said there was a “consensus” that increasing contributions was necessary to “avoid a future retirement crisis”, but warned ministers needed to be careful not to increase contributions too much because it could lead to workers dropping out of the pension scheme.
The Pensions and Lifetime Savings Association, which represents Britain’s pension schemes, has called on the government to increase minimum contributions from the current 8% of pension pay (basic salary before bonuses, commission and overtime) to 12% of gross salary over the next 10 years, to be shared equally between employees and employers.
“Without further policy intervention, most people in the UK will retire on inadequate pension income.” PLSA said last month.
The government said measures in the Pensions Bill could bring an extra £11,000 into the average worker’s pension fund, but did not provide any supporting analysis of how this figure was arrived at. The Bill includes efforts to ensure schemes provide “value for money” and drive underperforming funds out of the market. There are also plans to give employers more options to sell defined benefit schemes, to protect members if the employer funding them weakens.
The government said the move would “ensure security in retirement” and allow pension schemes to invest in a wider range of assets, which would in turn support economic growth.
Members of defined-contribution pension schemes (which are found in most private-sector workplaces, where savers bear all the risk) are “much less likely to enjoy a comfortable retirement than those in defined-contribution schemes.” [defined benefit] The pension system is report A report published by Scottish Widows last year said this reflected “the default auto-enrolment savings rate means many people are saving too little”.
Currently, individuals are left to navigate a complex retirement income market on their own, and the government plans to require trustees to offer retirement income solutions, such as annuities and withdrawal products, for those who want to stay invested.
Kirsty Anderson, retirement expert at asset management firm Quilter, said choosing how to withdraw from a pension – known as decumulation – “can be particularly risky without specialist help and could easily see savers run out of money in retirement before they pass away”.
She added: “By imposing a duty on occupational pension scheme trustees to offer retirement income solutions, or a range of solutions that include a default investment option, the government hopes to improve outcomes for savers and ensure more money is invested for longer periods.”
