A Government paper setting out how workplace pensions can be “reinvigorated” has received a mixed response from the industry.
The Department for Work and Pensions published a wide-ranging policy paper last week, titled Reinvigorating Workplace Pensions, outlining how it thinks saving could be made more attractive.
The department is exploring ‘auto-escalation’, a reform adopted in the US where employees’ pension contributions increase automatically when they receive a pay rise.
The document also reaffirms Government concerns about the impact of excessive charges, including consultancy charges, being levied on pension pots, pledging to stop schemes being use for automatic enrolment if fees are too high.
In addition, the DWP lays out a number of possible models for ‘defined ambition’ pension provision.
These include “core” defined-benefit schemes where indexation is not guaranteed and DB schemes where payments are crystallised at the point a member leaves the scheme.
The Government is also investigating defined ambition from a defined-contribution starting point. Options here include a money-back guarantee funded by a levy on members’ funds and a guarantee to cover retirement income in later years, again funded by a levy.
Labour Shadow pensions minister Gregg McClymont (pictured) says the Government has lacked urgency in its efforts to reinvigorate workplace saving.
He says: “This Government promised to reinvigorate workplace pensions, but after two and a half years all it has produced is a plan to develop a plan of action.
“The Government’s lack of urgency is astounding given independent report after independent report has exposed in the last year the potential for savers to be ripped off by high and unfair charges. The Government must act to ensure the success of the new workplace pensions.
“This means high quality, low cost transparent pensions managed by independent trustees and operating at scale. These are fundamental building blocks for pensions people can trust.”
Aegon regulatory strategy manager Kate Smith welcomes the “innovative ideas” in the report but says the proposal to crystallise DB benefits when a member moves employer is “riddled with problems”.
She says: “The idea of converting DB benefits to DC when someone leaves an employer is bizarre. It is riddled with problems.
“At the moment, it is very difficult to transfer from DB to DC and the Government and the regulator generally do not think it is in members’ interests. This is a highly advised area and it is not clear who would provide that advice under this model.”
Hargreaves Lansdown head of pensions research Tom McPhail says the Government will struggle to encourage providers to produce low-cost, guaranteed DC products that are attractive to savers.
He says: “I actually think the overall report is quite balanced and sensible and contains some interesting ideas.
“But the Government cannot just wave a magic wand and expect the industry to conjure up transparent, low cost, secure, guaranteed investments providing a good rate of return. If it was easy, then the industry would be doing it already.”