The Government’s pensions reform agenda is an ambitious one. From 2012, over a million employers will have to adopt new pension duties for their entire workforce, whether permanent or temporary. No private sector employer in the UK will emerge unscathed – all will have to make changes to their recruitment processes and benefits packages to adapt to automatic enrolment.
As well as giving greater access to the state pension, and so providing a better base for additional saving, the reforms, through automatic enrolment and mandatory employer contributions, should increase both the number of savers and the number of employers making contributions.
Alongside the new duties, the Government is introducing a new state-initiated occupational pension scheme, with the working title of personal accounts. The intention is for this scheme to reach the employers who the private pension market cannot economically reach.
The personal accounts scheme is necessary – without it pensions reform will fail. It needs to target these employers -most of them will be micro (less than five employees) and small (less than fifty).
The private pensions market will help create more people saving more money for their retirement. The secret ingredient behind every successful pension scheme is employer engagement, usually secured through advice. An engaged employer will pay higher contributions, offer additional benefits such as life cover, and arrange for their workforce to receive better communications, information, guidance and even advice. That can deliver an engaged workforce – who join the pension scheme, pay higher contributions, and most importantly stay with the pension.
This last point is vital. Automatic enrolment may get people to start pensions, but it won’t get them all to stick with saving. And someone starting a pension at 35, but who leaves five years later can expect to see their retirement income reduced by over 75 per cent compared to if they had stuck with the pension up to retirement.
But the private market also has an important role to play in providing competition for personal accounts. Employers will fall into different segments in the new world. Some already have a strong commitment to saving, and already offer private pensions to their workforce. These employers are probably the industry’s customers today, and are likely to remain so.
At the other end of the spectrum are those employers who do not currently make any pension provision. Predominantly, these employers will become customers of personal accounts, although some may prefer an industry alternative.
That leaves a middle segment of employers, for whom the personal accounts scheme and the private pensions market will compete. This dynamic competition will lead to innovative solutions in administration, investment, communications and service. This will create a better pensions environment for employers and employees, and so boost savings.
The Government has to both acknowledge and embrace the future role of the private pensions market. Changes need to be made to allow this market to thrive after 2012.
The answer partly lies in making sure the personal accounts charging shape and level are not allowed to become an explicit benchmark for other private pensions. Government and the industry have to realise the private market is different from personal accounts, it offers something extra, and that has to be paid for. So regulations for qualifying schemes should keep silent on charges, and the FSA will have to consider implications for broader advice on pensions.
Developing a charging structure based on a single management charge means putting the sustainability of the pension scheme at risk. A structure that more closely matches costs to charges is far more robust. But if the personal accounts scheme decides to take a less sustainable approach, then the private pensions market should not be forced to also take such economic risks.
Finally, we need to develop one set of rules for both trust and contract defined contribution schemes. The regulatory differences on trivial commutation and preservation are outdated and offer members no benefit.
Achieving success in pensions reform is always going to be a tough call. It involves changing the culture of a nation and turning them into pension savers. But to attempt this through only a government-initiated scheme, and to side-step the experience and talent a private pensions market offers, seems over-ambitious.
