Pension funds

It is almost a hundred years since Lloyd George introduced the Old Age Pension Act and established a guaranteed income for everyone over 70 years old. But things have changed since 1908, and rarely a day goes by without further debate about the way forward on pensions. For many years policymakers and the pensions industry have been concerned because millions of working people are not saving for retirement, and the problem of security in old age is now one of the most urgent political issues in Britain today. By Joanne Segars of NAPF.

One of the foremost concerns for Government is the economic cost of providing for an ageing population - without individuals taking greater responsibility for funding their own retirement, and the associated costs, the burden on the rest of the economy will become unsustainable. Quite simply, at current rates, we do not have the resources to sustain the ageing population in our present social, economic and demographic framework.

Today’s workers fund the retirement of many of today’s pensioners, but this is unlikely to be viable going forward. Back in Lloyd George’s day there were 10 workers for every pensioner. Now the ratio is four people in work for every one person in retirement. And as life expectancy improves, the number of pensioners is set to rise; so it will become more and more difficult to maintain standards of living for the retired population - by 2050 it is estimated that there will be just two working people to each pensioner.

So it is clear that to avert the very real danger of a pensions crisis in the future it is essential that people plan for the financial needs of their later years. But how do we bring about such a considerable change in the savings habits of millions of people?

Pension reforms required
The Pensions Commission (set up by the Government to examine the problem) concluded that ‘major reform of the UK pension system is needed to create a new settlement for the 21st century’, and the Government recognises that some big decisions need to be taken. Its own Pensions White Paper, published at the end of 2006, proposed such a radical reform, setting out plans for the automatic enrolment of all workers into ‘Personal Accounts’ - a form of workplace pension saving - by 2012.

Today’s pension schemes typically operate on an ‘opt in’ basis, and on average only 40% of employees join the scheme. However, where automatic enrolment is used, surveys indicate that the figure jumps to 80% or more.

The new Personal Accounts scheme will see many more people saving for their retirement, but it will also have a powerful impact on employers, Many businesses will be providing pensions for the first time, since by 2012 every employer in the UK will have to auto-enrol employees into a pension scheme. Companies will also have to make a minimum 3% contribution.

Employers will need to choose between automatically enrolling their employees into their existing workplace pension schemes or moving into the new system of Personal Accounts. They will also have to decide whether to set contribution rates at the minimum level permitted, or to extend to more employees the higher contribution rates which are typical of existing provision.

Large-scale levelling down of existing workplace pensions, however, need not be inevitable. So long as good quality workplace provision is supported, and Personal Accounts are implemented in a way that minimises the impact on existing arrangements, levelling-down could be the exception rather than the rule.

It is essential that Personal Accounts do not damage existing good workplace provision – or, indeed, discourage the future provision of employer-sponsored schemes. Therefore the new system must be carefully aimed at the right target audience – employees without access to a good workplace scheme. And practical support must be offered to those employers who are offering good schemes. The Government should provide financial assistance to help the latter meet the costs of auto-enrolment.

The Government should therefore adopt a fiscal incentive to promote levelling-up and to encourage employers to auto-enrol employees into a pension at today’s typically high level. This Good Pension Fiscal Incentive (GPFI) would apply for a short transitional period – probably the three-year period for phasing in mandatory contributions - in order to help employers offering good provision with the increased costs of the automatic enrolment of all their employees. And importantly, the GPFI would send a signal to employers that the Government supports those doing more than the statutory minimum - a message saying that the Government cares about maintaining good existing pension provision.

Good Pension Quality Mark
To help employers and employees value high-quality pension provision, we have proposed the introduction of the NAPF Good Pension Quality Mark. The Quality Mark would enable employers to demonstrate that they are offering a pension of better value than the Personal Accounts minimum and for the employee it would allow them to identify employers offering a good pension. It would also help to achieve the Government’s objective of increasing financial capability. The Government has signalled support for this NAPF initiative, and the Federation will be consulting with consumer, employer and employee representatives as well as pension providers as we develop the Quality Mark.

Providing help and guidance
Also key to the success of Personal Accounts is ensuring that consumers do not make poor choices or opt out because of lack of understanding. NAPF believes it is vital to give help and guidance through the provision of generic advice. And while considering the creation of a generic advice network, the Government should consider the role that the workplace can play in facilitating the provision of face-to-face information.

To help generate the step-change needed in pensions saving, the Government should fund advice through the workplace, which could then be delivered by experienced advisers. This has already been proven to be an effective and cost-efficient way of reaching large numbers of people by NAPF’s own PENSIONSFORCE initiative. This free and independent service, established to help people to understand the importance of planning for old age, is delivered through specially appointed volunteers with extensive knowledge of pensions.

To date, PENSIONSFORCE has held 67 meetings and spoken to 1,000 individuals at their place of work. PENSIONSFORCE provides generic advice using interactive methods that:

• raise awareness of the need to save;
• increase appreciation of the need to plan for retirement;
• ensure that people are better able to make informed choices; and
• show people where to go for more information.

Challenge and opportunity
The coming years promise unceasing activity on the pensions front as the face of UK pensions undergoes a period of unprecedented change. Bringing about such a change is an enormous challenge, but it is also an immense opportunity – the opportunity to have a positive impact on the retirement future of millions of UK workers.

Joanne Segars became the Chief Executive of the NAPF in October 2006, having joined the organisation in 2005 as Director of Policy. Before joining the NAPF she was Head of Pensions and Savings at the Association of British Insurers from 2001 to 2005. Joanne held the pensions brief at the Trades Union Congress for 13 years. She has a degree in economics from John Moores University, Liverpool and an MA in industrial relations from the University of Warwick. She was awarded an OBE for services to the pensions industry in the 2003 Queen's Birthday Honours.

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