Independent Financial Advisers Glasgow News & Guides

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 new report has revealed that the UK’s ‘Retirement Nation’, which includes all retired people, saves the state and society at least £25 billion a year through unpaid care, community and voluntary work.

However, the report, ‘Our Retirement Nation’, which was commissioned by MGM Advantage, warns that the contribution made by this part of society is not fully recognised and that the government and society as a whole need to do more to understand their emotional, health and financial requirements.

MGM Advantage is calling for fundamental changes to ensure that the Retirement Nation gets the respect and support it deserves from society, the media, the financial services industry and the government. Its recommendations and key findings are:

• Respect – A change in attitude towards the Retirement Nation and greater recognition for retired people and what they contribute to the UK – only 14% of retired people feel valued by society.
• Representation – The Retirement Nation is a big part of the UK society for what they contribute (£25 billion through unpaid care, community and voluntary work), but also the help and support they need. The Retirement Nation needs a voice. MGM Advantage recommends the Government creates a Minister for Retirement.
• Education – More done to help people maximise and make the best use of their financial wealth in retirement. The first step is to help people improve their basic knowledge about retirement and finance – 31% of retired over 55s have not heard of the Open Market Option.
• Simple products – Financial services and government need to continue to work together to innovate and design new retirement products that meet the needs of the Retirement Nation and are easy to understand, accessible, and offer good value – only 29% of over 55s know exactly what an annuity is.
• Ownership – People need to take ownership of their retirement planning – from building up a pension pot in their 20s and 30s to making the best retirement income decision when they retire – 54% of non-retired UK adults are not at all prepared for retirement.

A revised timetable for when employers of all sizes must start enrolling their staff in a workplace pension has been set out by the Government.

Large employers, those with 250 or more employees, will not face any change in the date they are due to start enrolling their staff.

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

Minister for Pensions Steve Webb said:

“Automatic enrolment will begin on time this October, taking up to ten million people into pension saving, many for the first time ever, and all employers will be part of it.

"We have done all we can to ease any burden on business the reforms will bring and employers of all sizes now know the date they need to start enrolling their staff."

The timetable for employers to begin enrolling their staff starts with the largest firms first, followed by medium, then small companies.

Automatic enrolment will begin in October 2012. All existing firms will have enrolled their staff by April 2017, followed by all new employers by February 2018. This new timeline means that 70% of individuals will be automatically enrolled before the next general election.

The level of pension contributions will be phased in over time to help employers and individuals adjust. Full contributions will have to be paid from 1st October 2018.

A consultation and draft regulations with more detailed information will be published shortly.

The number of businesses that have closed their final salary pension to all of their staff has jumped by a third, the National Association of Pension Funds (NAPF) has revealed.

Its latest Annual Survey found that almost a quarter (23%) of pension schemes are now shut to both new staff and to future contributions from people who were already in the pension. This is up by a third from 17% in 2010, and was just 3% in 2008.

The survey shows more change is inevitable. Among those pension schemes which are closed to new staff but still open to existing staff, 30% expect to close the pension altogether in the next five years. They plan to then move staff into a ‘defined contribution’ pension, where the employer is exposed to much less risk.

Meanwhile, one in ten (11%) say they will keep the existing defined benefit pension scheme structure, but will make it less generous. This could include changing accrual rates or moving from a final salary to a career average structure.

The findings reflect an escalation in the decline of final salary (or ‘defined benefit’) pensions, as schemes that have already closed to new joiners shift their focus to existing members.

Final salary pensions have been increasingly strained by rising longevity, poor investment results, and red tape. Employers have been closing these pensions to try to manage risks and mounting costs. Only 19% of private sector schemes are now open to new joiners, compared with 88% ten years ago.

The Minister for Pensions, Steve Webb, has promised to protect the pension pots of people who move jobs often by abolishing Short Service Refunds for defined contribution occupational schemes. These refunds allow individuals to get their pension contributions back – leaving them without a pension.

The Minister also committed to taking action to prevent people losing small pension pots. A recently published paper looks to address the complexities in the current system that make it difficult for people to transfer their pension pots throughout their careers into one big pension.

Steve Webb said:

"I am concerned that people are at risk of losing their small pension pots as they move from job to job. I do not want to see people who are doing the right thing by saving, ending up with very little for their retirement because the system is too complicated. I want to make it as easy as possible for people to grow big fat pension pots."

A highly mobile jobs market and the introduction of automatic enrolment will lead to around 4.7 million additional small pension pots in our pensions system by 2050.

With the average person working for eleven different employers over the span of their career it’s vitally important that barriers are removed to growing big fat pension pots.

Options for consultation range from small changes to encourage transfers, to an automatic transfer system where pension pots could either be consolidated in one or more ‘aggregator’ schemes or move with people from job to job.

A recent survey by the Chartered Institute of Personnel and Development has found that while the majority (75%) of employers are fully aware of imminent changes to workplace pension schemes, not as many are prepared for auto-enrolment - less than one third (32%) of employers know the date on which the new rules will apply to them.

While three in four (76%) of 55 and overs have some assets, savings or investments, only two in five (38%) say these assets, savings or investments are to provide additional income in retirement, according to research from Age UK Enterprises, the commercial services arm of Age UK.

New, recently published research suggests that the UK could be heading towards a perfect retirement storm.