Independent Financial Advisers Glasgow News & Guides

Pensions experts have identified a shopping list of key areas where the Government needs to focus its energies if it is to meet its Red Tape Challenge and reinvigorate workplace pensions.

These include the overly prescriptive rules on the type of pensions employers need to offer, and how employers communicate with the members of their pension schemes.

Responding to the Government’s “Pensions Spotlight”, the National Association of Pension Funds (NAPF) has called on the Government to seize the moment by streamlining regulations. It added that the Government needs to ensure that the regulatory regime for pensions protects members’ interests while not imposing unnecessary burdens on employers who are providing good quality pensions to their workforce.

Joanne Segars, NAPF Chief Executive, said:

“We welcome that the Government is taking a long hard look at pensions regulation. This is a positive first step in its wider commitment to reinvigorate workplace pensions.

“We need a regulatory system that protects members’ interests, whilst also supporting good quality workplace pensions.”

Nearly eight in ten British people think making British workers work longer than their European counterparts to receive their state pension is unfair.

A YouGov poll - commissioned by Unite, the Public and Commercial Services union and the National Union of Teachers – reveals that a clear majority of those born before 1977 polled (62%) are uncomfortable with plans to raise the state pension age.

A strong majority of voters (62%) believe that any attempt to continue to raise the state pension age will hit the poorest pensioners hardest. But while 57% of people polled do have some understanding of plans to delay the state pension age, a significant number (38%) do not.

The challenge of getting Britain’s workers saving for their retirement is highlighted in Aviva’s first Working Lives Report, which reveals the daily struggle faced by employers and employees as they seek to balance business priorities against personal financial needs.

Surveying UK private sector employees and employers about their attitudes to saving in the workplace, the Working Lives research shows businesses, Government and the pensions industry across Britain have significant work to do in encouraging employees to start putting some of their hard-earned cash aside for their retirement.

The report reveals that:

• Many employers (70%) are aware of pension reform changes but 68% of employees have little or no knowledge of automatic enrolment yet.
• Around 43% of employees currently without a pension said they would remain in a scheme once they were automatically enrolled – but opt outs could be significant.
• Employees are most concerned (53%) about how their pay compares to the cost of living, while employers worry most about keeping up with the competition (58%).
• More than half (56%) of employees agree pensions are the best way to save for retirement but 55% of employees without one say they simply don’t have the cash.
• Employers recognise their workers are critical to their business success, but over a third (39%) are looking to motivate them without ‘unduly increasing pay’.
• The first Savings Engagement in Employment Index shows significant room for improving employers’ and employees’ levels of awareness, ownership and enthusiasm for workplace saving.

The Government’s proposals to equalise Guaranteed Minimum Pensions (GMPs) would create massive costs and administrative burdens, increasing pressure on pension funds at a time when they are struggling with a tough economic environment, pensions experts have warned.

GMPs are sums of money built up by members of occupational pension schemes who have contracted out of the State Earnings-Related Pension Schemes (SERPS). The Government claims that it has to legislate to put the UK in line with EU law.

The National Association of Pension Funds (NAPF) argued that new legislation being proposed by the Department for Work and Pensions (DWP) would cost pension funds billions of pounds in extra liabilities and administration, and could also affect public sector pensions.

In its response to the DWP consultation on GMP equalisation, the NAPF has urged the Government to scrap its proposed new regulations. It also questioned whether there is any legal requirement for equalisation, and it has asked the Government to publish the legal advice on which it is basing its policy-making.

The UK’s leading pensions body also warned that, instead of clarifying the situation, the planned regulations would create more uncertainty for pension fund trustees, who would not know whether or not they would have to equalise GMPs.

With just six months to go until the largest employers start automatically enrolling employees into pension schemes, Friends Life has revealed new research showing that 61% of consumers admit they are not confident in their own abilities to save enough to fund their retirement without government or employer intervention.

Just 39% believed they could save enough on their own, without being forced to save by the government or being auto-enrolled by an employer. 

The research also revealed that only 8% of respondents rate saving for retirement as their financial priority and less than half (48%) are making regular contributions into a work based pension at the moment. Around 19% don't have any pension at all, one in ten (11%) doesn't know how much they contribute to their pension and 35% save less than £100 a month.

When asked how they would feel if the government made it compulsory to save into a pension, nearly half (46%) said they would see it as a helpful way to ensure they got a decent level of savings. A quarter (24%) said they would view it as an additional form of tax that they wouldn't want to pay, while 30% said they didn't have any strong feelings about it.

Findings also revealed:

• 5% aren't sure whether they have a pension or not,
• 3% don't know if their employer offers a pension which they could be saving into already and 8% say they have declined to join their employer pension scheme,
• 33% say paying off debt is their top financial priority, and
• 15% say saving for a house deposit is the most important financial challenge to them.

Six months to go until Automatic Enrolment begins and new figures show that final salary pension scheme payouts will reach a record high and peak this year.

Statistics from the Department for Work and Pensions show that the average amount paid from Defined Benefit (DB) schemes will reach the highest ever level this year and the amount will fall thereafter.

The average DB pension in payment will peak at around £7,100 a year towards the end of 2012 and will fall to just above £2,400 a year by 2060, marking a significant shift in pensions saving.

Currently, around six million pensioners benefit from some form of DB scheme but only 10% of firms have final-salary schemes that are still open. Workplace pension reform will bring up to ten million people into pension saving from this year.

Starting in October, people working for the largest employers will be automatically enrolled into a workplace pension scheme. Smaller businesses will follow. Individuals, employers and the Government will all contribute to an employee’s pension.

The final building blocks for automatic enrolment have been put in place as the Government published its response to the consultation on the earnings threshold.

With just over six months to go before the largest employers begin enrolling eligible workers into pension savings, the response sets out that automatic enrolment rates for the next tax year will be aligned with tax and National Insurance thresholds. This will make it easier for firms who will not have to negotiate another layer of complexity.

Minister for Pensions Steve Webb said:

"The overwhelming response to our consultation was the call to align the automatic enrolment trigger with existing payroll thresholds. This will help firms make a success of these reforms, as they will be able to better understand who is eligible to be enrolled.

"These changes strike the right balance between getting as many people into workplace pension saving as possible and ensuring that we do not enrol some people who would not financially benefit from saving. People who are excluded from automatic enrolment will still be able to opt themselves in, benefiting from a contribution from their employer.

The new, single tier State Pension announced in the Budget will dramatically improve savings incentives for people on a low income."

The Government must review the rates each tax year.

The Government must act to help savers with small pension pots get better outcomes in retirement, the National Association of Pension Funds (NAPF) has said. Hundreds of thousands of small pension pots are already “stranded”, a problem that is likely to get worse after the introduction of automatic enrolment.

Under automatic enrolment, as workers change jobs it is likely they will build up multiple pension pots. Small pots can be burdensome for employers and pension schemes, and they may not offer the best value for money for savers.

A study from the Institute of Fiscal Studies jointly funded by the NAPF and the Economic and Social Research Council highlighted the full-scale of the problem. It showed that £1.4bn is already trapped in 700,000 stranded workplace defined contribution (DC) pension pots worth less than £5,000.

In its response to the Government’s consultation on small pension pots, the NAPF reiterated its call for a new way of thinking about DC pensions. Large scale, good quality trust-based pension schemes would secure better outcomes for savers and would also deal with the small pots problem. The NAPF called on the Government to set up a framework for new Super Trusts that will make it less likely that people will transfer their pension pots, and give them the opportunity to consolidate their existing pension provision.

A report by Friends Life has revealed that more needs to be done to ensure women's long-term savings are not hampered by the impact of starting a family.

The latest Visions of Britain 2020 report has exposed a worrying number of women who are less clued up about pensions than their male counterparts, and the company is urging employers to do more to combat the issue.

The report has also found that almost half (49%) of women do not save into an employer-sponsored pension scheme. A further one in ten are unsure if they save at all.

Kim Clarke, Head of HR at Friends Life, commented:

"We believe that employers may well consider the short-term financial impact of female employees starting a family through supportive flexible working practices but what about the long-term impact? When women return to work they often go back part time in the first instance, meaning that the percentage of their salary that they can save is much smaller, while at the same time their outgoings have increased. Unless drastic changes are made, many women may find that starting a family could negatively affect their retirement pot."

Recent research has found that the majority of Brits (65%) continue to rely on the state pension to provide them with an income in retirement, and only 4% expect NEST to form part of their pension income.

The study, by unbiased.co.uk, also revealed that while the state pension topped the list of retirement income sources, almost half (47%) of Britons expect to rely on a private pension to play a part in their retirement provision, followed by a quarter (25%) who named ISAs as their retirement income source.

One in seven women (14%) expects to rely on their partner to provide an income in retirement, compared to only 5% of men. Only 41% of women count on a private pension to provide for their retirement (against a national average of 47% and 54% of men).

Karen Barrett, chief executive at unbiased.co.uk, said: “Planning for retirement is one of the most important things we can do to ensure we are financially secure in the long-term and as our research shows, there is a multitude of retirement savings options out there.  But not every option is right for everyone and it is important to realise that simply relying on the state to provide for you is not going to be enough. 

“We all have to take ownership of our own financial future and plan for our income in retirement accordingly, whether it is through just putting money into a savings account or actively contributing to a private pension.”

New research from MGM Advantage reveals that the average retired person feels they need an extra £140 a week, or around £7,300 a year, to be financially comfortable. For the retirement nation as a whole, this equates to around £86 billion a year.

However, MGM Advantage says if people shopped around before accepting the annuity rate or product offered by their pension provider, this could increase their income by as much as 50%, helping close the gap.

Breaking down retirement income needs on a gender basis, MGM’s research reveals that the average retired man says he needs an extra £153 a week, compared to £127 for a typical retired woman. Looking at the regions, retired people in Wales claim they need an extra £8,835 a year, which is the highest in Britain. The corresponding figure for Scotland’s retired population is £5,791, which is the lowest in the country.

Aston Goodey, Sales and Marketing Director, MGM Advantage said: “Financially, these are difficult times for the retirement nation. Inflation has increased the cost of living, while returns on savings have fallen due to the impact of historical low interest rates. This environment makes it even more important that people take the appropriate steps to ensure they maximise the income from their pension and claim any benefits to which they are entitled.”

People approaching retirement will receive much greater support to get the best possible retirement income under a compulsory Code of Conduct launched by the Association of British Insurers (ABI).

ABI figures show that a third of people do not shop around for an annuity when they reach retirement and, as a result, may be missing out on a higher income, potentially losing thousands of pounds over the course of their retirement.

In addition, many customers who could qualify for an enhanced annuity, due to medical conditions or lifestyle choices, buy a conventional annuity, which may mean they miss out on a higher income during retirement.

The ABI’s Code of Conduct will ensure customers have access to information to enable them to make an informed decision about annuities appropriate to their needs and lifestyle in retirement. The Code continues the work of the ABI to improve customer engagement and contribute to the financial education of customers.

The Code of Conduct will require the ABI’s members to:

• Provide clear and consistent communications to ensure customers are able to make informed and proactive decisions about retirement income products, and are able to shop around for the most appropriate product.
• Prominently highlight enhanced annuities, and the much higher income they can potentially offer, and inform customers whether they offer these products, and how to find out who does.
• Clearly signpost customers to advice and support, both from regulated advisers and government-backed advice organisations.
• Establish transparency in the annuity market so that customers have a clear picture of how individual providers’ product offerings fit in with the wider market.

The Financial Services Authority (FSA) has published a consultation paper outlining proposals to change the way pension transfer analysis is carried out. The proposed changes will clarify and update the current standards and aim to ensure that pension scheme members considering a transfer are given a fair assessment of what they will receive in retirement.

A pension transfer is where a pension is moved from a defined benefit (DB) scheme (such as a final salary pension scheme) to a personal pension scheme. On retirement, retirees can convert a personal pension fund into an annuity or draw money from the fund, known as income drawdown, to provide regular payments.

Current FSA rules already set out how to calculate the benefits of a transfer that will be given up when members transfer to a personal pension; this is a process called transfer value analysis (TVA).

The TVA process compares the pension benefits from the DB scheme with those that could be provided by the personal pension scheme. The FSA believes TVA is a complex process and requires the full facts to be presented to the member before any action is taken. The starting point is always that a transfer will not be in the client’s best interests.

The FSA is proposing changes to ensure that the assumptions advisers use for the comparison are applied consistently by all firms, take account of recent UK and EU legislation, and use reasonable growth rates for illustrating the results of the comparison to the member.

To ensure that TVA is carried out with a member’s best interests central to any decision, the FSA is proposing:

• to update the rules for calculating mortality to be aligned with those used by the Board for Actuarial Standards, and therefore making them consistent with annual pension statements that all personal pension holders receive once a year;
• to calculate annuities on a gender-equal mortality rate, in line with the European Court of Justice’s decision in March 2011 (see Notes to Editors 2);
• to introduce a Consumer Price Index (CPI) assumption for re-valuing pensions in deferment, reflecting legislative changes made by the government in 2011;
• to require CPI-linked benefits to be valued using the Retail Price Index (RPI)-linked annuity interest rate;
• that Limited Price Indexation (LPI) annuities will be valued on the same assumptions as RPI-linked annuities; and
• that the comparison provided to the member is illustrated on growth rates that take into account the likely returns of the pension fund assets as well as the transfer of risk from the DB scheme to the member.

A survey by the Chartered Institute of Payroll Professionals (CIPP) has found that the majority of employers (74%) have not started communicating to employees about automatic enrolment, which starts to roll in from October this year.

The CIPP survey, which polled 103 payroll, HR, accounting and finance professionals, also found that a small number of respondents (4%) were unsure of their staging date.

The survey also revealed that 61% of companies have decided where the responsibility for automatic enrolment lies; for most (42%) it will fall to payroll departments. For nearly a quarter of organisations (23.5%) it will fall to HR departments, 9% finance and interestingly over a quarter (26.5%) of all payroll, HR and finance departments will work together.

Automatic enrolment, otherwise known as the Workplace Pension Reforms, will be introduced from October 2012. Automatic enrolment will see every eligible employee enrolled into a qualifying pension scheme to which both the employer and employee will contribute. The Department for Work and Pensions have started communicating these changes through various media channels since January.

The European Commission has published a White Paper on adequate, safe and sustainable pensions, which looks at how the EU and the Member States can work to tackle the major challenges that confront our pension systems.

It puts forward a range of initiatives to help create the right conditions so that those who are able can continue working - leading to a better balance between time in work and time in retirement; to ensure people who move to another country can keep their pension rights; to help people save more and ensure that pension promises are kept and people get what they expect in retirement.

The White Paper proposes, in particular, to:

• Create better opportunities for older workers by calling on the social partners to adapt work place and labour market practices and by using the European Social Fund to bring older workers into work. Enabling people to work longer is a major focus of the European Year 2012 for Active Ageing and Solidarity between Generations;
• Develop complementary private retirement schemes by encouraging social partners to develop such schemes and encouraging Member States to optimise tax and other incentives;
• Enhance the safety of supplementary pension schemes, including through a revision of the directive on Institutions for Occupational Retirement Provision (IORP) and better information for consumers;
• Make supplementary pensions compatible with mobility, through legislation protecting the pension rights of mobile workers and by promoting the establishment of pension tracking services across the EU. This can provide citizens with information about pension entitlements and projections of their income after retirement.
• Encourage Member States to promote longer working lives, by linking retirement age with life expectancy, restricting access to early retirement and closing the pension gap between men and women.
• Continue to monitor the adequacy, sustainability and safety of pensions and support pension reforms in the Member States.

The TUC has urged the government to freeze the lower thresholds in the auto-enrolment regime - keeping the bottom of the earnings band on which contributions have to be paid (£5,564) and the earnings level at which auto-enrolment is triggered (£7,475) - at their current levels.

The government is set to introduce a new earnings trigger for auto-enrolment, following their review, which recommended that workers should only be auto-enrolled once their earnings rose above the income tax threshold (£7,475). They would still pay contributions from the bottom of the earnings band.

However, the TUC argues that women would be the main losers from the new earnings trigger as the vast majority of workers with pay between the lower limit of the earnings band and the income tax threshold are women working part-time. The auto-enrolment trigger should therefore be frozen, says the TUC.

The TUC believes that linking auto-enrolment with the income tax threshold is particularly damaging given the coalition plans to increase it to £10,000.

A TUC analysis of official earnings data shows that the new earnings trigger could eventually stop around two million women from being auto-enrolled into pensions.

More than half of corporate financial advisers think that up to 30% of UK workers could opt out of the government’s new auto-enrolment regulations due to be introduced from October 2012.

Independent research from Aviva shows that the majority (98%) of corporate advisers expect some degree of withdrawal by employees from workplace savings schemes they would automatically be enrolled into. Around 20% predict that half of all employees will opt-out, a further 59% forecast that there will be up to a 30% drop out rate, while only 2% expect there will be no drop out. Most worryingly though, half of all corporate advisers think that the largest proportion of opt outs will be in the 35 and under age group.

The research highlights the importance of engaging employees on the benefits of saving in the workplace early, particularly amongst younger workers, many of whom will be saving into a pension for the first time.

Of the top five reasons advisers gave as the main barriers to saving amongst the 35 and under age group, the largest proportion (80%) say they don’t think younger workers can afford to save, while:

• 72% say that they have other financial priorities
• 69% believe that they think they are too young to worry about their retirement
• 63% don’t think they trust pensions
• 47% say that they don’t think the younger employees understand the benefits of a workplace pension compared to other kinds of saving.

The widespread view amongst advisers is that younger workers live in the "here and now" and have other things to worry about at the moment, a view that is echoed by this age group themselves, whose main current financial goals are to buy a house (36%); pay off debts (34%) and pay off their mortgage (20%).

The Department for Work and Pensions (DWP) has published a package of regulations to help employers prepare for automatic enrolment into workplace pensions. 

This package, alongside the revised timetable for automatic enrolment published last week, is designed to make it easier for business to manage their new duties. With these regulations in place, the legislative framework underpinning these reforms is now almost complete.

The DWP has also published the Government’s response to the consultation published last summer on workplace pension reform regulations, and guidance on certifying pension schemes.

The consultation looked at arrangements to put into effect the remaining recommendations of the Making Automatic Enrolment Work Review on optional waiting periods and simplification of the certification process.

It also covered new statutory instruments on special occupations not included previously; seafarers, offshore workers and police not under a contract of employment.

A revised timetable for automatic enrolment was published on 25th January, giving employers clarity and certainty about their starting dates.

This followed the announcement, in November, that small firms would be given more time to prepare for automatic enrolment to help them out in exceptionally tough economic times.

As the economy continues to falter, employers in the US have become increasingly reticent about their employees' ability to successfully save for retirement, according to a new survey by Aon Hewitt. In response, employers are embracing innovative solutions to help rethink their retirement benefits plan strategies and assist their employees in better preparing for retirement.

Aon Hewitt surveyed more than 500 large U.S. employers, representing over 12 million employees, to determine their current and future retirement benefits strategy. According to the findings, just 4% of employers are very confident that their workers will retire with adequate retirement assets, down substantially from 30% in 2011. Additionally, only 10% of plan sponsors feel very confident that their employees are taking accountability for their own retirement success. Fewer than one-in-five employers (18%) are confident that workers will be able to manage their income during retirement.

While more than half (52%) of employers will focus on encouraging workers to take greater accountability for their retirement savings in the year ahead, they aren't asking employees to do it all on their own. Almost half (44%) of employers will focus on helping workers retire with enough money and most (60%) say that they will place a greater emphasis on helping employees understand and use the employer-provided resources available to them.

Employers also continue to enhance their defined contribution (DC) plan features. As in years past, plans will continue to add automatic features, in addition to expanding savings choices and offering employees more resources to help them meet their needs while in retirement.

Automatic enrollment has been one of the biggest retirement trends in recent years, and will continue to be in the year ahead, albeit with an enhanced focus on outcomes. Currently, 55% of plan sponsors automatically enroll workers in their employer-provided defined contribution plan, up from 24% in 2006.

The opportunity to benefit from employer contributions remains the single biggest reason for people to stay ‘auto-enrolled’ in new workplace pension schemes, according to latest research from the Association of British Insurers (ABI).

The ABI consumer survey suggests the introduction of auto-enrolment from October could not come fast enough for many as a way of bringing them out of the ‘savings stalemate’. Not missing out on employer pension contributions (47%) and on tax relief from contributions (14%) were the most popular reasons encouraging people to remain ‘opted-in’ to workplace schemes. This clearly shows that people see the value of their money being made to work harder by the extra top ups they will get from their employer and the Government.

Overall, more than half (53%) of people not already in a company pension scheme say they will remain ‘opted-in’ when their employers begin automatically enrolling them in eight months’ time, and this comes before any significant promotion of the new scheme.  With a further 30% of people still undecided, we could see even more remaining ‘opted-in’ and saving for their future. 

A similar scheme in New Zealand has seen the amount of workers saving for their pension more than double, with more than half of the country’s working population now enrolled. The UK could see even higher figures as its auto-enrolment arrangements will cover all eligible workers, rather than only those who are changing jobs or just starting work.