The Workplace Retirement Income Commission’s (WRIC) 86 page report titled ‘Building a Strong, Stable and Transparent Pension System’ has urged the government to focus on higher contributions by employers and employees in pension funds.
“People need to get more bang for their buck or they are not going to bother,” said Lord McFall, chairman of the commission, underlining the importance of better returns on retirement savings. It also argued in favour of a cap on charges.
“The government could leave itself open to complaints about mis-selling, (in the absence of a cap on charges)”, the report observed.
Paul Waters – partner at Hymans Robertson, said while there was nothing new in the report, he welcomed the commission’s message that UK needs to transform itself into a nation of savers from spenders and savings products should become more accessible.
Talking about higher pensions contributions, he said employers should ensure that the scheme switches members from a ISA type vehicle into medium and long-term savings schemes after a period of time.
“Employers will continue contributing for staff but that funding can only be paid into a pension, so you have got into the savings habit early. You could still pay into an ISA after that time but the employer will stop funding it for you in favour of a pension,” he observed.
The committee had suggested hiking the minimum compulsory pension contribution from the current 8 percent by 2017, since longevity is expected to go up.
The report further observed that it is often very difficult for people to buy annuities with a pension pot smaller than £5,000. The rates are often very poor, even if they manage to buy one. The government should think of pooling small pots in a default scheme where they can be managed efficiently, the report observed.
Emphasizing on medium term savings vehicle, Waters said: “We need something that encourages people to put money in an ISA but is not accessible for five or ten years and then at that point give an added benefit, such as a save-as-you-earn scheme, to transfer into a pension. The key thing is to get people saving more and not just switch pension saving into short-term saving.”
The Association of Consulting Actuaries (ACA) supported Lord McFall’s call for higher pension contributions and wider employer participation, saying costs should be kept at a minimum while mitigating risk to the extent possible.
“We remain convinced that trust-based, collective arrangements are the best means to deliver good pensions for the majority of employees,” said Stuart Southall, chairman of ACA.
Criticising the high charges of the yet-to-be rolled out auto-enrolment program, director general of SAGA Ros Altmann said: “I think the focus on charges is misguided and we tried charge caps with stakeholder but they did not work. The 1 per cent charge cap ended up at 1.5 per cent and the National Employment Saving Trust is taking a 1.8 per cent upfront charge on all contributions so the myth of cheap pensions remains just that, a myth.
“The reason, however, that people are not saving in pensions is that they do not trust them and do not like them. Pensions need an image makeover to make them more user-friendly,” she explained.