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Govt explores ‘auto-escalation’ of pension contributions

Steve Webb 480 NAPF 2012

The Government is exploring ‘auto-escalation’ of contributions as part of a consultation on reinvigorating occupational pensions.

Auto-escalation is a policy adopted in the US where employees’ pension contributions increase automatically when they receive a pay rise.

A Department for Work and Pensions paper published today, titled Reinvigorating Workplace Pensions, recognises that the automatic enrolment minimum of 8 per cent contributions may not provide people with an adequate retirement income.

It says: “For many people, saving the minimum amount will not be enough to give them the level of income they would like to achieve in retirement.

“One way of encouraging people to go beyond the statutory minimum, where it is appropriate for them to do so, is by using automatic escalation.

“As with automatic enrolment, an individual no longer has to take an active role once they have signed up and decisions to increase saving happen automatically when they get a pay rise.”

The consultation also reaffirms Government concerns about the impact of excessive pension charges, including consultancy charges, being levied for auto-enrolment.

It says: “We are monitoring charges, including consultancy charges, very closely and have been clear that we will take prompt action if we see evidence that charging structures are being used inappropriately or if charge levels are excessive.

“In particular, we have powers to stop a scheme from being used for automatic enrolment if its fees are too high or if members are required to pay for anything which doesn’t deliver them a pension benefit.

“We could take action within months so the industry has every incentive to do the right thing.”

The DWP also sets out potential 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.

In addition, policymakers are considering the importance of scale in delivering defined ambition pensions.

Pensions minister Steve Webb says: “Now is the time to reinvigorate workplace pensions. If we simply stand by as too many previous Governments have, another generation could miss the chance to put something by for their old age.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. So after destroying occupational pensions they are reinvigorating occupational pensions by using auto escalation.

    You couldnt make up this lack of joined up thinking.

    Didnt they think of this before launching NEST?

    PS a true occupational pension was always linked to your salary – what they are talking about is a glorified group personal pension which I am pretty sure usually increased contributions when your salary increase being based on a percentage of your earnings.

    Talk about reinventing the wheel.

  2. Sean

    Maybe so, but in this case it will no doubt rely on members as well as firms escalating their contributions. (Yes I know of contributory DB schemes, but in this case we are talking about the smallest of firms who hitherto have not had the impost of pension provision)

    Is this inflationary or what? If the rate of contribution increase is ahead of salary increase what do you think will happen?

    In the case of companies, we are not talking here of BP or Shell. The very reason that final salary schemes have all but disappeared is because they were an ‘open chequebook’ liability on the company. Additionally it became grotesque when contributions to the pension scheme outstripped dividend payments. Hardly a robust business proposition.

    DB has also been the cause of company insolvencies – particularly with PPF intervention. So what’s better – a company pension for a few years and then having to look for a job – or somewhat better job security? (Indeed even the biggest companies have been scrambling out of DB – IBM, M&S, and Unilever; just three examples.

  3. Harry agree with your comments and could probably add a few more.

    My point is that as usual those in power seem to make it up as they go along in the hope of appearing to be doing something.

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