Auto-enrolment of employees into workplace pension schemes began in earnest in October as new “employer duties” officially impacted upon the nation’s largest employers.
Many employers already operate workplace pension arrangements. Some will have started auto-enrolment ahead of schedule.
For the vast majority of workers, future retirement aspirations are wholly dependent on savings in defined contribution schemes.
This leads to a plethora of options at retirement age, which are not worth much unless there is a reasonable size fund saved.
Members should not believe that minimum contributions will suffice to sustain them in retirement. That said the reduction in illustrated growth assumptions (from April 2014) might dispel that in one fell swoop!
Much is said regarding costs and charges around defined contribution schemes and how they impact on individuals’ savings. Undoubtedly, higher charges can seriously erode the value of modest savings and when coupled with poor investment performance this is a recipe for disaster. However, if the underlying investment performs well in the longer term, charges can become less of an issue.
Many members of workplace pension schemes may not have the will or ability to select the funds that they invest in. If they do, how many of them actively review these funds with their adviser? The likelihood is that they will simply accept the default option because they lack the confidence to do otherwise.
The FSA has pronounced on the thorny subject of “consultancy charging” on DC schemes, used for auto-enrolment. Advisers would do well to remember that “consultancy charges” taking the member’s contribution below the statutory minimum level will not be permitted. Adviser charging against a member’s fund is a different matter.
Over recent years, investment markets have been volatile and uncertain, so to a degree, the general public has lost patience and confidence.
This is also apparent to the Government. In a recent statement pensions minister Steve Webb said “Our evidence is that people of all ages and all income levels value greater certainty about their retirement income.”
Now as an addendum to auto-enrolment, and amongst other things announced by the DWP in its publication “Reinvigorating Workplace Pensions”, the Government is seeking to address this by looking for ways to provide investors with “guarantees” in relation to the size of their eventual fund.
This is not a consultation paper but sets the scene for how further reforms to the pension market may be undertaken and how savers could be encouraged to save more during their working lifetimes.
However, guarantees cost money and that presents a problem, notably, who foots the bill?
One suggestion is that individual savers could pay a levy for an effective capital guarantee at retirement. This would not come out of the statutory contributions but from higher monthly contributions for those who value the guarantees enough to pay for them. It does however beg the questions:
Would the prospect of higher contributions appeal to the target market for auto-enrolment?
Would levy payments attract tax relief?
A suggested alternative is “enhanced DC”, whereby some form of “smoothing” is incorporated so pension income is less uncertain than under what the DWP call “pure DC”. Is it just me, or is anyone else experiencing a touch of déjà vu?
Mark Pearson is director of business development at Origen Financial Services