List of Recommendations
Increasing participation in pension saving
Addressing the decline in retirement saving
1. We
welcome the decision by successive governments to pursue auto-enrolment
in order to address the steady decline in pension saving. The
policy has been designed to encourage high levels of participation
in workplace pension saving, whilst retaining an individual's
freedom to opt out. The recommendations contained in our report
are intended to support the successful implementation of auto-enrolment.
(Paragraph 18)
Estimated participation rates
2. Retirement
saving through auto-enrolment may be even more attractive to individuals
if it offered additional financial incentives or flexibilities.
We welcome the Minister's willingness to look at this again. In
its review of auto-enrolment scheduled for 2017, the Government
should consider the advantages and disadvantages, including the
legal implications, of enabling individuals to withdraw pension
savings to buy a first home. The New Zealand experience may offer
evidence on the extent to which savers' behaviour has been affected
by this aspect of the KiwiSaver scheme. (Paragraph 25)
Relationship between auto-enrolment and the State
Pension
3. The
current State Pension system, with its means-tested Pension Credit
top-ups, may act as a disincentive to some individuals on lower
incomes who are considering workplace pension saving. The Government's
plans to reform the State Pension and reduce means-testing are
therefore welcome, and essential in creating a simpler foundation
pension which will enable people to increase their retirement
saving with confidence that they will not be penalised by losing
state benefits. (Paragraph 30)
4. The
Government must set out its detailed plans for State Pension reform
as a matter of urgency. Individuals need certainty on the Government's
plans if they are to make informed decisions about their retirement
saving and whether to remain enrolled in their workplace scheme.
Equally, financial advisers need clarity about the future of the
State Pension if they are to provide sound, long-term advice to
individuals. We urge the Government to proceed with its reform
of the State Pension without delay and to introduce its Bill on
State Pension reform in the 2012-13 session of Parliament. (Paragraph
31)
Minimum thresholds for employee eligibility
5. We
understand the complexities in setting a minimum income threshold
for automatic enrolment and accept the rationale behind the current
threshold levels. The case for increasing the income threshold
significantly above its current level in real terms is not clear.
As women have historically retired earlier, and had lower earnings
and lower pensions than men, we believe that it is very welcome
that auto-enrolment will bring so many millions of women into
pensions saving for the first time. However, as women make
up the majority of persistently lower earners, the Government
needs to consider the impact on the gender pensions gap when setting
the income threshold. We do not regard it as essential that there
should be a permanent link between the auto-enrolment threshold
and the income tax threshold. (Paragraph 38)
Impact on existing workplace pension schemes
6. We
recognise the risk that some employers may level down their existing
pension provision to the statutory minimum for auto-enrolment,
although it is very difficult to assess the extent to which this
might take place in practice. However, the risk that some employers
may level down their contributions is outweighed by the strong
likelihood that auto-enrolment will introduce millions of individuals
to pension saving for the first time. (Paragraph 42)
Encouraging contributions above the minimum rate
7. The
minimum contribution rate of 8% is an important and realistic
starting point for auto-enrolment. During the implementation stage,
it is sensible for the Government to encourage participation in
pension saving by increasing individual and employer contributions
gradually to this moderate minimum level. (Paragraph 48)
8. It
is unlikely that 8% will secure a level of retirement provision
which most employees would consider adequate. The Government should
therefore conduct a review to examine a) how to promote saving
above the 8% minimum; and b) whether it should raise the statutory
minimum above 8% over the longer term. This review should take
place by 2014, building on the lessons learned from implementation
up to that point. Waiting until the review scheduled for 2017
to consider these issues could mean that many employees miss out
on higher pension contributions for a longer period. (Paragraph
49)
Ensuring pension schemes offer value for money
Criteria for auto-enrolment providers
9. Employers
will be responsible for ensuring that their pension provider meets
the Government's criteria for auto-enrolment. Providers are not
currently required to register with The Pensions Regulator to
ensure that they are eligible. This may represent a regulatory
gap, and we are concerned that some employers may unknowingly
enrol their staff in schemes that do not meet the criteria. Equally,
the criteria for providers appear relatively light compared with
the New Zealand model. The Government must monitor this situation
closely. It should act to strengthen the minimum criteria for
providers, or require providers to register with The Pensions
Regulator, if it becomes clear that some providers are not safeguarding
the interests of pension scheme members. (Paragraph 55)
Transparency of pension scheme charges
10. If
auto-enrolment is to be successful in convincing people to increase
their retirement saving, it is essential that providers offer
value for money for employees who are automatically enrolled and
that they demonstrate that this is the case. A competitive market
of providers should help promote this but it will only work if
charges are clear, understandable and comparable. In the insurance
industry, comparison websites are available to enable people to
compare providers, and we believe that the pensions industry should
aim to establish a similar model. (Paragraph 61)
11. Current
industry practice and regulation does not offer sufficient transparency
for employers or savers. We welcome the work that the NAPF and
the pensions industry are undertaking to develop transparency
around pension scheme charges and look forward to the NAPF's code
of practice. (Paragraph 62)
12. We
expect to see the industry make progress on improving transparency
and will continue to monitor their actions in this regard. It
is imperative that the pensions industry establishes a clear,
accessible and universally-adopted model to allow the comparison
of charges and that this is in place by the end of 2012. This
would ensure that the model is available to all employers choosing
schemes from 2013 onwards. (Paragraph 63)
Regulation of fees and charges
13. It
should be borne in mind that the employer will choose the pension
scheme but the consequences of that choice in terms of the level
of charges and the potential lack of value for money will fall
on the employee. Given the current complexity of pension scheme
charges, it is important that the Government and the pensions
industry create a model that helps protect employers against the
risk that they will, inadvertently, select a scheme that offers
poor value for money for their employees. (Paragraph 70)
14. The
Government must monitor the pension market to ensure that scale
and competition between providers is effective in keeping charges
at a low level. We recommend that the Government, or The Pensions
Regulator, publish a report every two years on the value for money
of pension scheme charges, including an assessment of the levels
of fee applied under auto-enrolment. (Paragraph 71)
15. Whilst
we accept the Government's current rationale for not applying
a cap on scheme charges, this approach will only work if all providers
act with transparency and offer genuine value for money in relation
to charges. During 2012, the pensions industry has an opportunity
to demonstrate that it can operate fairly and effectively without
a cap on charges. From 2013 onwards, if it transpires that some
auto-enrolment providers are applying hidden charges, or charges
that represent poor value for money, the Government should use
its powers to intervene. (Paragraph 72)
Short service refunds
16. We
welcome the Government's intention to ban short service refunds.
This measure will help individuals experience the benefits of
longer-term saving for retirement and reduce the risk that their
employer contributions will be lost. (Paragraph 75)
Active member discounts
17. Active
member discounts sometimes reflect the additional costs of administering
inactive pensions but can also lead to disproportionately high
charges for individuals who are no longer contributing to their
scheme. We believe that pension providers should operate a fair
balance between active and deferred members and that the Government
should consider intervening if this issue is not resolved by greater
consolidation of small pots into single schemes. (Paragraph 79)
Implications for employers
Financial and administrative impact on employers
18. We
recognise that auto-enrolment will create new costs and administrative
requirements for employers at a time of economic uncertainty.
However, we believe that, through the staging and phasing arrangements,
the Government has designed a flexible and gradual implementation
process with employers' needs in mind. (Paragraph 101)
19. We
understand the calls from employers' representatives for some
exemptions to auto-enrolment, for example for micro businesses,
but believe such concessions would add to the complexity for employers,
as well as having detrimental effects for employees. It is also
important to bear in mind that micro businesses and their employees
have to date been the hardest group to reach in terms of workplace
pension provision. We therefore support the Government's decision
that auto-enrolment should apply to employers of all sizes. (Paragraph
102)
20. Whilst
we recognise that the requirement to re-enrol individuals every
three years has administrative and cost implications for employers,
we believe this step is necessary to ensure high levels of participation
in workplace pension saving. (Paragraph 103)
Delays to the auto-enrolment timetable
21. We
note with regret the delays to the schedule for implementing auto-enrolment
announced in November 2011, although we recognise that these delays
may be welcome to some small employers. The delays mean that millions
of employees will start workplace pension saving later than anticipated,
and overall retirement saving will be reduced significantly as
a result. It is vital that there is no further postponement to
the implementation timetable, and we welcome the Minister's assurance
that the timetable will not be changed again. (Paragraph 110)
Preparation of payroll providers
22. Given
the concerns that employers' representatives have expressed about
the administrative implications of auto-enrolment, we believe
that it is important that TPR takes the steps necessary to ensure
that payroll providers are supporting employers towards a smooth
transition to the new arrangements. (Paragraph 113)
Ensuring employer compliance
23. Ensuring
employer compliance is critical to the success of auto-enrolment
and the programme could suffer reputational damage if a large
number of employers are seen not to be fulfilling their duties.
The resources that the Government makes available for TPR to address
non-compliance must reflect emerging evidence on employer awareness
and compliance levels, particularly during the implementation
phase for medium and smaller employers. (Paragraph 125)
24. Relying
on whistleblowing to identify non-compliance has inherent problems,
particularly in respect of small firms where the fact that a business
has only one or two employees will make it impossible for TPR
to guarantee anonymity to the person making a complaint. TPR needs
to consider very carefully how it will address this issue and
whether it needs to use more proactive methods to check compliance
amongst small employers. We therefore recommend that, by the end
of 2013, TPR provide a written update on its plans for dealing
with non-compliance among small and medium employers, drawing
on its latest research on employer awareness and preparation.
(Paragraph 126)
25. The
Government should take steps to ensure that HMRC, the Health &
Safety Executive and other relevant enforcement bodies are working
closely with The Pensions Regulator to promote compliance, including
sharing relevant information where employers are found to be in
breach of their auto-enrolment requirements. (Paragraph 127)
Communications
Employer awareness of auto-enrolment
26. Effective
communication will be vital to ensuring employer compliance. The
Government and The Pensions Regulator must continue to research
and monitor awareness among employers and publish the findings.
If awareness among smaller employers remains low by 2014, we recommend
that The Pensions Regulator consider writing to employers earlier
than 12 months ahead of their staging date. (Paragraph 135)
Availability of advice for employers
27. Employers
must be able to access impartial information on choosing a workplace
pension scheme for their employees. We recommend that the Government
and The Pensions Regulator lead a discussion with employers and
other relevant stakeholders about the availability of independent
and impartial information. The Government should then ensure that
effective support for small employers is available by July 2014
at the latest. (Paragraph 141)
Communications with individuals
28. While
most employees will not need one-to-one guidance on auto-enrolment
it is important that it is available for those who do. The Government
and the pensions industry should work together to ensure that
individuals are able to access independent one-to-one guidance,
including by telephone alongside online information. This information
should include well-publicised and sound guidance for individuals
considering opting out. Guidance to employers on choosing an auto-enrolment
scheme should also include information on how to involve employees
or their representatives in the choice. (Paragraph 147)
The operation of NEST
Restrictions on NEST's operation
29. We
understand the rationale behind the restrictions placed on NEST
as part of the sensitive consensus agreed between the Government
and the various stakeholders. However, we are very concerned that
two restrictions will have unintended consequences: the cap on
contributions will add complexity for small and medium businesses,
and the ban on transfers will be disruptive for both employers
and employees who would like to transfer existing pension pots
into NEST. We believe that these restrictions may prevent NEST
from addressing the market failure that it was designed to resolve.
If state aid rules allow, we therefore recommend that the Government
removes the cap on contributions and the ban on transfers as a
matter of urgency. (Paragraph 175)
30. The
growing problem of small stranded pension pots needs to be urgently
addressed, and we warmly welcome the Government's consultation
on consolidating small pension pots. NEST would appear to be the
obvious choice for the role of aggregating small pots into a single,
larger pot. If the Government wishes to pursue this option, it
will of course need to remove the ban on transfers of pension
funds into NEST. (Paragraph 176)
NEST's investment strategy
31. Whilst
we understand the views of witnesses who considered NEST's investment
strategy to be overly conservative, we believe that NEST's approach
has a clearly explained behavioural rationale and will be distinctive
in the marketplace. It will help to ensure that savers are not
deterred by potential temporary falls in the value of their pension
which might lead them to withdraw from their auto-enrolment scheme
and exacerbate resistance to retirement saving. (Paragraph 182)
32. Over
the longer term the Government, the pensions industry and NEST
must act to increase savers' awareness and understanding around
the advantages and disadvantages of investments. We recommend
that the Government's communications strategy for auto-enrolment
includes a strong focus on improving the public's understanding
of effective retirement saving. (Paragraph 183)
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