Millions facing 'bleak private pension future'

The stark assessment came in a report commissioned by the National Association of Pension Funds (NAPF), which revealed "widespread concern" about the charges, risks and complexity of the pensions of Britain's 23 million employees in private firms.

As many as nine million people - more than a third of the private sector workforce - could "fall through the cracks" in the system unless the government and industry reforms the "costly and inefficient" schemes, according to the report from the Workplace Retirement Income Commission, chaired by Lord McFall of Alcluith - the former head of Westminster's Treasury select committee.

The former Scottish Labour MP's commission called for increased contributions, more low-cost schemes and help to "mitigate" the risk of investment funds it said were "at the mercy" of stock markets.

Other key recommendations centred on calls for "more accessible" pensions and a permanent independent commission as part of a better deal to help workers save enough for their retirement.

Lord McFall said the spotlight for reform had rightly fallen on public sector pensions, with the UK government planning to increase employee contributions, but he claimed there were "critical problems" in private schemes offered to employees.

He also said "too many people are being short-changed" by their choice of annuity - a type of insurance policy that provides a regular income in exchange for a lump sum.

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The report highlighted "complacency" over the 14 million private sector employees who are not saving into a workplace pension, although ten million are due to start being automatically enrolled into one from next year.

Lord McFall said: "It has been a shock to find out that even after auto-enrolment, up to nine million people may still fall through the cracks in the system and many will be on course for a very poor old age.

"In a rich nation such as ours, this is scandalous.

"It is clear from all that we have heard that for many people, particularly those in defined benefit schemes, pensions have proved a good investment and many people retiring today are part of a 'golden generation' of pensioners. But for those who will retire in years to come, the future looks far less certain.

"Some have said to us that any consideration of further reforms to the system can wait. We have been disappointed by this level of complacency, because nothing can be further from the truth.

"That is why we are setting out our recommendations for action now, to enable these gaps in public policy to be tackled, and a roadmap for action to be agreed and embarked upon."

Lord McFall warned that people would be forced into "scraping by in poverty" on the state pension because of employees not saving enough.

"Too many people are stuck in a complex, costly and inefficient system that relegates the consumer's interest to second place," he said. "On top of that, they simply aren't saving enough to secure a decent retirement.

"People need to get more bang for their buck, or they're not going to bother with a pension. Instead they'll end up spending today, ignoring tomorrow and scraping by in poverty on the state pension.

"We cannot stand by and let that happen. The complacency of many in the pensions industry is alarming."

A key section of the report warned of a "rude awakening" for millions who "will face a bleak old age", which it described as "serious issues that cannot be ignored".

There was also a call for a cap on "high charges" for pension schemes from the commission, members of which include John Hannett, general secretary of shopworkers' union Usdaw, and Paul Johnson, director of the Institute for Fiscal Studies.

The report said: "The 8 per cent of salary minimum contribution set by the government's auto-enrolment reforms will not be sufficient.

"The government must now start to investigate how the contribution floor can be increased following its review of auto- enrolment in 2017. In the meantime, the government should work with employers to pilot ways of encouraging people to save more.

"High charges can have a big impact on savings. People's money must work for them. First, the government must ensure good value for money out of auto-enrolment pensions by capping the charges allowed in them."

Senior SNP MSP John Wilson, deputy convener of the Scottish Parliament's economy committee, welcomed the report but called for restrictions on how pension funds can be invested to reduce the risk of reduced payments to employees.

He said: "Many people have been led to believe that by investing in private pensions they are safeguarding themselves against poverty in retirement.

"However, the investments by some pension fund managers have led to some people receiving drastically reduced payments. I hope the UK government will give serious thought to look at how it can protect the pensions people contribute to during their working lives."

Scottish-based pensions provider Standard Life called for a "concerted effort" to improve the UK's pensions system.

A spokesman said: "We believe the workplace will play an ever-more important role in helping to bridge the pensions savings gap, particularly with the introduction of auto- enrolment in 2012.

"If we are to grasp this opportunity it will require a concerted effort from employers, employees, the government and pension providers."

A spokesman from Age Scotland said: "The report is right to conclude that contributory pension schemes should be more accessible and affordable.

"There's also a real need to simplify the pension schemes that are available, as it's all a bit of a mess at the moment and is far too complex in many cases."

A Department for Work and Pensions spokesman said: "Ensuring the private pensions sector is fit for purpose is a priority for the government.

"We have already taken significant steps to reforming the system. We are consulting on simplifying the state pension to provide a clear foundation for saving and people will start to be automatically enrolled into a workplace pension from October 2012, helping millions to save for the first time.

"We are working closely with the pensions industry on many of the issues raised."

A Scottish Government spokesman said: "This policy area is reserved to Westminster, and the report does demonstrate the need for improvements in the pensions industry.

"One concern is that by focusing on ill-judged changes in public sector pensions, the UK government is paying insufficient attention to these very pressing problems in the private sector."

Ten million will be enrolled in their employer's scheme, like it or not

TEN million workers in private firms will automatically be enrolled in company pension scheme under the UK government's auto-enrolment scheme.

The scheme is being introduced as part of plans to reform pensions, which also include proposals to increase the pension contributions of public sector employees and raise the retirement age.

Under the auto-enrolment plans being introduced in 2012, employees will be included in their firm's payment package unless they opt out.

It has been estimated an extra seven million will join company pensions, which will alleviate strain on the state to provide for the elderly.

Between October 2012 and September 2016, employers will be required to enrol automatically all their employees who are not already part of a fund into a qualifying pension scheme.

While organisations with more than 50 members of staff will be required to provide a pension scheme, the self-employed and those in smaller firms will be invited to join a new government-run National Employment Savings Trust.

However, experts have warned that staff may have to pay significantly more to maintain a company pension as a result of the radical reform. Opponents say this will also lead to increased costs for employers.

Critics have said that the move will lead to many cutting their contributions "to a minimum", with the typical amount dropping close to 3 per cent.

Lord Hutton, a former Labour minister, has also carried out a review of public sector pensions which led the UK government to announce controversial plans to increase pension contributions for employees.

Ministers want to save 1.2 billion next year through the move, which could see the contributions of some employees go from the current rate of 1.5 per cent to as much as 3.9 per cent.

Under plans announced last week, public sector employees earning 21,000 to 30,000 would see their contribution go up from, 1.5 per cent to 2.7 per cent, while those paid between 30,000 and 50,000 would see their pension contributions more than double to 3.1 per cent.

Contributions paid by those earning between 50,000 and 60,000 rising from 1.5 per cent to 3.5 per cent.

The UK government has announced 12 weeks of consultation on the changes.

Minister have also agreed to increase the pension age for both men and women from 65 to 68 between 2024 and 2046.

How it works

IF YOU have a money purchase pension scheme you can use the cash you have saved to buy an annuity. This effectively "unlocks" the money you have saved in your pension fund to provide an income in retirement.

The amount you get will depends on your age, gender and medical history - and the current annuity rate.

The problem facing people who are retiring at the moment is the poorer annuity rate on offer. The rate is crucial, because it determines how much income a person will receive for the rest of their life.

Annuity providers invest largely in ultra-safe government stock, and the rates of return available from this type of investment is closely linked to the Bank of England base interest rate.

When retirement age is reached, the pension scheme manager will write outlining the annuity rate that they currently offer.

However, pension scheme members have the right to shop around for the best annuity rate, under an "open market" option - and can often get a better deal by doing so.

Members of personal pensions and stakeholder schemes can also normally take up to 25 per cent of their fund tax-free.

Also, if you are a member of a group personal pension or a group stakeholder plan, you can take up to 25 per cent of your fund tax-free.

When you take your tax-free lump sum you usually have to buy an annuity with the rest of your fund.

Pension savers can now ignore the option to buy an annuity altogether. Instead, people can now draw down an income directly from their pension fund, leaving their pension cash invested.

However, any money left in their pension fund on death could be liable to an inheritance tax charge.