The Pensions Regulator is consulting on “enabling good member outcomes in defined-contribution work-based pension provision”. Automatic enrolment from October 2012 will mean between five and eight million people are expected to start saving, or save more, into a workplace pension scheme.
Employers are also likely to auto-enrol their employees into a contract or trust-based DC scheme. Given the expected growth in DC scheme member-ship, the regulator wants to make sure its DC regulatory strategy is fit for purpose.
In its discussion paper, the regulator has identified six member outcomes it believes are necessary to achieve an adequate retirement. At the top of the list is appropriate contribution decisions. This is closely followed by appropriate investment decisions, efficient and effective administration, protection of assets, value for money and appropriate decumulation decisions.
As part of the analysis, the regulator has segmented the market to see which areas are likely to produce good quality provision.
It is not a surprise that bigger occupational schemes and workplace personal pensions with an advised and engaged employer deliver the best member outcomes.
Small occupational schemes and workplace pensions without engaged employers or an adviser, including numerous empty stakeholder schemes, tend to deliver poorer member outcomes. Once auto-enrolment kicks in, there are likely to be more unengaged employers, some of whom will set up work-place pension schemes while others will choose Nest.
The issues under discussion by the regulator are wide ranging and address some important issues. But the single most important way for DC members to secure adequate income is to save as much as they can for as long as they can, with as few breaks as possible.
There is no doubt that auto-enrolment will kickstart pension saving but, for the majority of people, the regulatory minimum 8 per cent contribution will not be enough to provide an adequate income when combined with the state pension.
It is not the regulator’s responsibility to set statutory minimum contribution levels or to give guidance on what is adequate. But as this is recognised as the most important factor in achieving an adequate income, it is important that the regulator works closely with the DWP, FSA and pension industry to make sure people understand what appropriate contributions look like without putting them off saving.
TPR has concentrated on “good outcomes” at scheme level rather than at member level, and should take into account individuals moving from one employer to another.
Estimates indicate individuals have an average of 11 employers during their working lifetime and, under auto-enrolment, they are likely to build up pension pots with most of their workplace schemes, some of which will be very small. But transferring small pension pots can be difficult, as financial advice may not be available.
Regulatory barriers need to be removed to encourage individuals to transfer these pension pots between employers’ schemes. Enabling individuals to consolidate their pension pots allows them to see how much they have built up and what more they need to do.
The discussion paper highlights some important issues and it is vital that the Government, regulators and pension industry work together to help people to understand the value of retirement savings. The consultation closes on April 22.
Kate Smith is pensions development manager at Aegon