The impact of auto-enrolment on pensions has been huge, with workplace pension coverage rising from 46.5 per cent in 2012 to 72.9 per cent in 2017.
This is welcome – I know from experience as joint secretary of the largest pension scheme in Scotland that auto-enrolment has increased coverage, particularly among lower paid, mostly women workers.
However, this cannot mask the fact that our pension system has serious problems.
The UK has the lowest state pension provision in the developed world, so an adequate income in retirement is dependent on occupational schemes, either defined benefit (DB) schemes, which guarantee the pension a worker receives on retirement, or direct contribution (DC), which depends on the performance of investments.
Employers prefer DC schemes because they shift the risk to workers. I am frequently faced with employer claims that DB schemes are no longer viable because of increased longevity and the declining value of investments. Neither of these claims are true. The increase in life expectancy has stabilised, in fact went down last year, and investment returns have rarely been higher.
Sadly, many pension schemes are not managed as well as they should be. In particular, small schemes rely too heavily on external investment managers. Although many private sector DB pension schemes are closed to new members, the sector remains important with around 10.5 million members. With roughly 14,000 employers currently supporting DB pension schemes, and around £1.5 trillion in assets held by these schemes, the DB sector is of crucial importance to the UK economy and retirement incomes.
While the growth in pension coverage is welcome, contribution rates are low. The initial default minimum contribution rate was only 2 per cent of qualifying earnings. More than half of all private sector employees with a workplace pension contribute less than 2 per cent. The minimum contribution is now 5 per cent (with at least 2 per cent from the employer). This will rise to 8 per cent next April (with at least 3 per cent from the employer).
It remains to be seen, at a time when real wages are falling, if these increases result in higher levels of opting out, particularly amongst the low-paid.
The growth in coverage is largely in low value DC schemes. This type of scheme places the investment risk on the workers who are least able to sustain it. This leaves workers to navigate a world of jargon including “drawdown” plans, investment options, “uncrystallised” funds, annuities, and how and when to take the tax-free lump sum. They also have to make some big guesses about their health and life expectancy.
Coupled with so called ‘pension freedoms’, potential for rip-offs is enormous. The Westminster Work and Pensions Committee has made a welcome recommendation that the government creates a low-cost deal at retirement which is as automatic as the current enrolment system.
The same committee highlighted market failure in relation to the pension freedoms and called for the government to rethink its decision not to allow state-backed provider NEST to offer retirement products. As they say: “Concerns that allowing NEST to offer such products would hinder competition in the market would carry greater weight were there evidence of a functioning market currently.”
Their recommended charging cap also brought howls from private pension providers about ‘one size fits all’ provision. But those who have saved very little through auto-enrolment need consumer protection – the rich who can afford advisors can worry about the benefits of choice. Which leads us onto lack of transparency over investment manager fees.
UNISON has campaigned on this for several years – a cause now been taken up by the Financial Conduct Authority. Its study found that fund managers were overcharging clients for hundreds of billions of pounds worth of investments. They enjoy huge profits and salaries, but performance is frequently mediocre. If low-paid workers are to be encouraged to hand over higher contributions, then every penny needs to go into their pension pots, not the pockets of fat cats currently ripping them off. It’s no accident that the Netherlands, with one of the most transparent fee systems in the world, delivers up to 50 per cent higher returns for pensioners.
Let’s celebrate the pension coverage increase– but recognise that we have to put our pensions system in order.
Dave Watson, head of policy and public affairs, UNISON.