The Government's pension reform

Written evidence submitted by the Chartered Institute of Personnel and Development (CIPD)

Background

1. The CIPD’s primary purpose is to improve the standard of people management and development across the economy and help our individual members do a better job for themselves and their organisations. The Public Policy team at CIPD promotes an agenda for productive workplaces to boost economic performance and improve the quality of working life.

2. As Europe’s leading professional body for those involved in the management and development of people, we are ideally placed to contribute to the development of public policy across the spectrum of workplace and employment issues.

3. We are able to draw on the experience and knowledge of our 135,000 members and our wide range of research to provide a pragmatic stance on public policy that is based on solid evidence and the real world.

4. Our membership base is wide, with 60% of our members working in private sector services and manufacturing, 33% working in the public sector and 7% in the not-for-profit sector. In addition, 76% of the FTSE 100 companies have CIPD members at director level.

General Comments

5. The CIPD is broadly supportive of the changes outlined in the Pensions Bill . We believe that the introduction of auto-enrolment and the creation of a low-cost national pension saving scheme mark a turning point in UK pension provision, representing a unique opportunity to raise awareness and enthusiasm among employees in saving for their retirement.

6. The 2012 reforms will affect most workers, but auto-enrolment may prove difficult with certain staff groups, such as casual workers, seasonal workers and those studying for qualifications at work . With low earnings growth and ongoing unemplo yment, we are concerned that some employees may struggle to set money aside for savings just as the 2012 reforms start to come into effect.

7. Against the backdrop of a tough economic climate with somewhat unfavourable average pay conditions, it will be difficult to encourage those not involved in a pension scheme to stay in the scheme once enrolled . CIPD research indicates a far more subdued pay outlook than expected by the OBR. For example our flagship report, the Labour Market Outlook , completed by 759 employers from all sectors, found that e xpected base pay increases have fallen to 1.3% from 1.5% over the past three months . Average pay settlements in the public sector are expected to fall to -0.33%, compared to 2.3% in the private sector

8. Combined with high inflation we expect a real squeeze on take home earnings . According to our Employee Outlook: Summer 2010, 36% of respondents expect their standard of living to decline over the next twelve months , whilst 47% of employees struggle to make it through to their next payday without finding themselves short of money

9. We also support the work of the Independent Public Service Pension Commission. It is important that public sector pensions are an attractive yet affordable employee benefit and an important element of talent management. While it is likely that they will be brought into line with private sector schemes, Government will need to manage this process carefully to avoid industrial unrest.

Raising the State Pension Age

10. The CIPD supports the increase in the state pension age from 65 to 66, as doing so reflect s the changing demographics of the UK and could result in significant economic benefits on a national level. We also support the cre ation of a flat-rate non-means-t ested benefit . This would help the general public understand what pension they could reasonabl y expect from the state and feel secure that they would not be penalis ed for saving. It would also help employees understand and appreciate the value of their employer ’s contribution.

11. We also support measures to encourag e older workers to remain in employment longer , thereby supplementing their inc ome and supporting saving for retirement. Government has a vested interest in changing public perceptions of retirement and working life, if we are to rebalance the state pensions system. Phasing out the Default Retirement Age is a welcome step towards breaking down the barriers to continued employment of older workers.

12. Our Employee O utlook: Summer 2010 research shows willingness amongst older employees to work past 65. 41% of older workers plan to continue working past retirement in some capacity . Of these, 72% cited financial reasons for doing so, suggesting that many cannot afford to retire at 65. A further 41% want to continue working because they enjoy the social interaction , whilst 34% value the increased self-esteem they gain as a result of their work .

13. The CIPD has also called for flexible working to be extended to all employees, and for retirement overall to become a more flexible process , better incorporating part-t ime work and training . O ur Tapping into talent research indicates that embracing greater flexibility in the workplace would encourage older workers to work longer. 28% of older workers said they would work longer if allowed to work flexibly . A further 21% would continue working if offered more varied and interesting work , whilst 6% would continue working if offered the opportunity to learn new skills .

Introducing automatic-enrolment into workplace pension schemes

14. The CIPD supports the move towards automatically enrolling employees into a work-based pension scheme from 2012. We also welcome the creation of the National Employment Savings Trust (NEST) to provide a pension for employees who may not be attractive to pension providers.

15. We believe that auto-enrolment, alongside the creation of a low-cost national pension saving scheme, represents a unique opportunity to raise awareness and interest among employees in saving for later life. We need to encourage more people to save more for their retirement or, within a generation, we will face a crisis where many people do not have enough money to fund their retirement. However, we need to ensure that reforms are acco mpanied by strong communication on the part of employers and Government regarding what is to change and why, if they are to prove most effective.

16. CIPD research indicates that introducing auto-enrolment will improve pensions uptake. Our Employee outlook: Focus on pensions shows some reasons employees give for not joining a workplace pension : 34% say there is not a pension scheme for them to join and 21% claim t hey cannot afford to join a scheme . A further 13% claim that they currently have more pressing financial priorities .

17. In addition, there is a low level of awareness among many employees of their current pension provision and how future cha nges will therefore affect them. 17% of workers are unaware of their own contribution levels to their pension , and 33% are unaware of their employers’ contribution levels . These levels are even higher in the public sector.

18. Our research shows that people would be encouraged to save more for their retirement if they had a better idea of how much they needed to save. Our Employee Outlook: Focus on pensions showed that 44% of employees would be encouraged to save for their retirement if they knew the size of the pension pot they would need in order to retire comfortably .

19. This displays the need for Government to work with employers to heighten employee and public awareness of the value of saving. The CIPD specifically calls on Government to raise awareness among employees of these crucial 2012 pension reforms so that the communication burden does not fall solely on employers. If people are to be encouraged to save for their retirement, the Government and its agencies must invest in marketing upcoming changes to employees, so that they understand what is being done, and why.

Using the CPI as the measure for up-rating workplace pensions

20. We are unsure as to why the government has changed the inflation measure used to up-rate state and public sector pensions. While we accept that RPI may not be an appropriate index for this purpose, we are not convinced that the CPI is any more appropriate. The only arguments given for the adoption of CPI are firstly , that it doe sn’t include housing and secondly , that by taking up CPI we will be aligning ourselves with a common European standard.

21. We also oppose the move to change the measure to up-rate accrued pensions and pensions in payment. We believe that this will reduce confidence in pensions among public sector employees and may reduce their effectiveness as a recruitment, retention and engagement tool. Furthermore, it may in extreme cases act as a flash point for industrial action. Instead, we believe that this change should only apply to future accrual.

22. Regarding private sector pensions, we welcome the option for pension schemes to adopt a measure of inflation for revaluation and indexation that may be more appropriate for their needs, especially if it allows D efined Benefit (D B ) schemes to remain open for longer . However, such a change should only be done in consultation with members and trustees and the final decision should not impact on rights that have already been accrued. We need to build confidence among employees that saving for retirement is a good thing to do and this will not be helped by shifting the goal posts.

23. The CIPD would like the government to consider the issue of pension buy-outs and buy-ins. This issue will be complicated by a shift from RPI to CPI as annuity providers will find it difficult to provide annuities with CPI increases until the Government starts to issue CPI-linked gilts.

February 2011