The UK Government is publishing its Pensions Bill today. Under the likely new statutory system, employers will pay only 3 per cent of salary towards an employee’s scheme. Workers will pay 3 per cent and the Government a further 1 per cent. Workers will be automatically enrolled into a scheme and will have to opt out. The provisions will come into effect between 2014 and 2017.
In principle this is the right approach given the paucity of company pension provision. Incidentally, despite much talk of 'gold plated' public service pensions there is a high opt out among low paid staff here too. This is likely to rise as a consequence of the Hutton Review and increases in contributions.
However, there are some obvious difficulties. Even allowing for opt-outs this is likely to increase the amount employers pay into schemes and this could result in some firms reducing the sums they pay to each individual worker’s pension. Large firms typically pay 6 to 10 per cent of a worker’s salary into a defined contribution pension scheme. So we could see a levelling down, particularly in the current tight labour market. A survey last year suggested that 40 per cent of big firms were looking to reduce their contributions when auto-enrolment begins.
The problem is even greater in small firms because two-thirds offer no pension at all and others offer low contributions. The Association of Consulting Actuaries (ACA) calculates that a total contribution of 15% of salary is required to provide a reasonable retirement income. So a statutory scheme that only requires a 3% employer contribution is simply inadequate.
Another problem, and after cost, the main reason for high opt outs is worker confidence in the pensions system. Annuity rates have fallen for the third consecutive year, primarily due to a combination of increased life expectancy and falling gilt yields. The income a man aged 65 can expect to get from an annuity purchased now is 46.6% lower than it was in 1995, at £607, compared with £1,138. Women have seen a fall of 43.7% in the annual pension they can get.
That confidence is further dented when workers understand that they are being ripped off by pension providers through high fees. This was highlighted in a report by David Pitt-Watson, one of the country's leading pension fund managers, and a team from the Royal Society for the encouragement of Arts, Manufactures & Commerce. This report shows that British workers are about a third worse off in retirement than workers in Holland – and it's mainly down to the fees charged on our pensions. Up to 40% of pension value in Britain in goes in fees. Someone saving £1,000 a year throughout their working lives would retire on an inflation-protected pension worth £16,080 a year if they did not pay fees. However, the typical fees levied by British pension funds would reduce the payout to £9,900 annually.
So, in principle the Pensions Bill is a small step in the right direction, but it could result in a levelling down to inadequate pensions for more workers. Plus, the real issue the Government should tackle is the pension fee rip off. But like the bankers bonuses, tackling that is unlikely to be on the Government's agenda.