WRIC Final Report

Private sector workers must get a better deal from their pensions if they are to save enough for retirement, an independent investigation warned today.

The Workplace Retirement Income Commission (WRIC) has uncovered widespread concern about the charges, risks and complexity of the pensions which affect a private sector workforce of over 23m people, or 80% of all workers.

With 14m currently not saving into a workplace pension, and with 10m due to start being automatically enrolled into a workplace pension from 2012, the WRIC believes there is an urgent need to improve the UK’s pensions system.

Lord McFall of Alcluith, the former Treasury Select Committee chair who led the WRIC, said:

“Too many people are stuck in a complex, costly and inefficient system that relegates the consumer’s interest to second place. On top of that, they simply aren’t saving enough to secure a decent retirement.

“People need to get more bang for their buck, or they’re not going to bother with a pension. Instead they’ll end up spending today, ignoring tomorrow, and scraping by in poverty on the state pension. We cannot stand by and let that happen. The complacency of many in the pensions industry is alarming.”

The WRIC report raises particular concerns about the defined contribution (DC) pension schemes which are becoming the norm in the private sector as ‘final salary’ pensions decline.

While it believes DC pensions have the potential to be very good, the report highlights seven key ‘red flag’ areas for the Government, employers, individuals and the pensions industry to focus on.

1. Adequacy – many people who are saving into a pension are not saving enough. And the 8% of salary minimum contribution set by the Government’s auto-enrolment reforms will not be sufficient for many people. The Government must now start to investigate how the contribution floor can be increased following its review of auto-enrolment in 2017. In the meantime, the Government should work with employers to pilot ways of encouraging people to save more.

2. Charges – fee structures are too opaque, and high charges can have a big impact on savings. People’s money must work for them. First, the Government must ensure good value for money out of auto-enrolment pensions by capping the charges allowed in them. The cap should match the existing limits on stakeholder pensions: 1.5% pa for the first ten years, and 1% thereafter. Failure to do so could leave the Government open to complaints about ‘mis-selling’. Second, the UK is unique in having many small, inefficient pension schemes. New structures need to be developed to allow bigger, low-cost pension schemes to operate.

3. Annuities – too many people are being short-changed by their annuity choice, and that single decision can affect them for decades. Annuity rates offered can vary by 25% or more across providers for the same individual and annuity type – to the huge detriment of those consumers who fail to shop around. The Government and industry must ensure the vast majority of people end up with the best value annuity. Annuities should be more flexible so that they meet changing spending patterns in old age.

4. Risk – people in DC pensions are being left to carry all the risk of funding their retirement. They are often confused by investment choices, and are at the mercy of stock markets. The Government must work with the industry to develop new products that help mitigate risk, and employers must be incentivised to take on a share of pension risk.

5. Small Pension Pots – private sector workers often have several smaller pension pots from previous jobs. This makes the funds difficult to manage and leaves them vulnerable to charges. It is also very difficult for people with pots of less than £5,000 to buy an annuity – even if they can, the rate is often poor. The Government should consider defaulting small pots into places where they can be managed efficiently. This includes NEST, which is currently banned from taking them.

6. Cultural Change – we need to be a nation of savers, not spenders. Savings products must become more accessible. Employers are scared to offer advice about pensions and must become reengaged through tax incentives and the creation of ‘safe harbours’ that allow them to discuss pensions more thoroughly with staff without excessive fear of legal comeback.

7. Stability - trust in pensions is low and the five-year political cycle does not fit with the long-term nature of pension saving. A permanent, independent pensions commission should be established to take the politics out of pensions.

Lord McFall, WRIC Chairman, said:

“Pensions have become a burning issue. The spotlight for reform has rightly fallen on the public sector, but there are critical problems in the private sector as well.

“Defined contribution pensions can be very good, but they have to meet the right standards. We need to focus on getting the future right.

“Sadly, millions of people are being left to navigate a pensions minefield that would puzzle Einstein. We’re seeing less saving and lower trust in pensions, and that’s a vicious cycle that cannot continue.

“Auto-enrolment will help, but it’s a halfway point, not the final answer. More needs to be done. We hope this report will be a catalyst for discussion about the bigger picture.

“There’s no point in bringing people into pensions that will erode their savings through high fees. The Government should set a clear ceiling on the charges that will be allowed under auto-enrolment.

“Annuities stand out as an area sorely in need of a shake-up. People are being shortchanged by the current system, and it’s unfair that a miscalculation can haunt them financially for decades.

“Pensions are a long-term issue and the public is tired of short-term tinkering. We need a permanent, independent commission to take the politics out of pensions and restore some faith in the future.

“We’ve brought our publication of this report forward by a few months as the key problems are already clear to us. With auto-enrolment just round the corner there is no time to waste.”

The WRIC’s conclusions are based on over five months of investigation, consultation and interviews with consumers, the pensions industry and employers across the UK.

The WRIC was initiated by the National Association of Pension Funds and launched in February 2011. The Commission, which is made up of six commissioners, was tasked with finding ways to improve the state of retirement saving in the UK.

Notes to editors
The Workplace Retirement Income Commission is made up of:
• Rt Hon John McFall, Lord McFall of Alcluith, WRIC Chairman. Made a Life Peer in 2010 following 23 years’ service as MP for Dumbarton and later West Dunbartonshire. He was Chairman of the House of Commons Treasury Committee.
• Graham Cole, Chairman of major manufacturer AgustaWestland.
• John Hannett, General Secretary of Usdaw, the UK’s fourth biggest trade union.
• Chris Hitchen, Chief Executive of the Railways Pension Trustee Co Ltd and former NAPF Chairman.
• Paul Johnson, Director of the Institute for Fiscal Studies, Britain’s leading independent microeconomic research institute.
• Imelda Walsh, former HR director of Sainsbury’s and author of an independent review into extending the right to request flexible working.

Contact: press@wricommission.org.uk

At the Association of Consulting Actuaries annual Chairman’s Dinner on 7th April 2011, ACA Chairman Stuart Southall praised the work of the Workplace Retirement Income Commission saying:

“With Government either bereft of, or unwilling or unable to develop, ideas for a proper reinvigoration of occupational pensions, the ACA warmly welcomes the establishment of the Workplace Retirement Income Commission chaired by Lord McFall.

With his considerable political experience and Treasury Select Committee, no nonsense, approach Lord McFall is no doubt much better qualified than industry organisations to present a balanced case to Ministers. Unlike the ACA he will not be rebutted with the regular, but frankly completely unfair, charge that he represents a special interest group.

We hope too that he will convey a clear message that extending a modest level of retirement provision across the workforce is a laudable aspiration but that the bigger prize is to move many more from that level to a position of comfort. In our view that means much more than a retirement income replacement rate of 45% for a median earner. This will be unachievable for most without the proper engagement of willing employer sponsors and this is where the crying need for reinvigoration really fits in.

So, in conclusion, the ACA gives a warm welcome to NEST, tips its hat at the policy aims on State pensions, but registers – not for the first time it must be said – disappointment at the genuine lack of progress to turn the tide in the UK private sector occupational pensions space.

We wish Lord McFall better luck and we will certainly be engaging most fully with his February Call for Evidence after we have consulted our own membership a week today. I am sure other interested parties will be doing likewise and, as a convenient aide memoire, the deadline for responses and for your Olympic ticket applications are both 26 April.

Perhaps it’s not too much to say that both could be once-in-a-lifetime opportunities.”

ENDS

People in the West Midlands who have yet to retire are the least confident in England that they will have enough money in their retirement, a newly released survey shows.

Six out of ten (62%) in the region said they are not confident they will have enough money, which was the weakest result of all the English regions, and compares to 55% across Britain.

The figure, from a YouGov survey for the National Association of Pension Funds, also shows that only 44% in the West Midlands who are not retired are planning on funding their retirement with a workplace or private pension. That was the joint lowest result in Britain alongside the North East and compares with 49% across Britain.

And 12% of respondents in the West Midlands said they do not trust financial products. For Britain this figure was 8%, and the West Midlands result was higher than anywhere else.

The results come as a leading politician visits Birmingham today (MON) to discuss the UK’s looming pensions crisis with businesses from across the West Midlands.

Former head of the Treasury Select Committee Lord McFall will meet groups of pension funds to see how to encourage saving for retirement, particularly through workplace pensions.

Lord McFall said:
“Half the workforce is staring down the barrel of a retirement spent in poverty, and that’s totally unacceptable. We need to find a better way of getting everyone to save for their older age.

“This is a UK-wide issue which we have to tackle before it’s too late. But there are some stark indications that the problem is worse in the West Midlands. More people here are worried that they won’t have enough money in their retirement, and fewer people are saving into a workplace pension.

“I’ll be asking local pensions experts to discuss what we can all do to improve the outlook for retirement saving in the region. Their views and ideas will help build my final report, which I’ll put to the Government.”

Today’s visit is the first regional meeting of a series to be held across the UK over the coming months as Lord McFall gathers evidence for the new Workplace Retirement Income Commission (WRIC) which he is chairing.

Lord McFall will be joined in Birmingham by fellow WRIC commissioner Imelda Walsh, former HR director of Sainsbury’s. The private meetings will be attended by several pension schemes from West Midlands businesses, both big and small, covering the manufacturing, automotive, and service sectors.

The Commission is fully independent, and will seek out a wide range of views and research before making its findings public in October 2011. Its final thoughts will be put to policymakers to help the Government meet its coalition agreement commitment to “reinvigorate occupational pensions”. The WRIC will not be looking at public sector pensions.

The WRIC will focus on pensions and other workplace savings vehicles. It will ask what barriers to workplace retirement saving exist for both employers and staff, and explore ways of overcoming these.

Notes to Editors:
1. Lord McFall is available for interview.
2. Survey figures are from YouGov Plc. Total sample size was 4177 adults of which 342 were from the West Midlands. Fieldwork was undertaken between 21.01.11 – 24.01.11. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+). The full questions and their responses are available from the NAPF press office.
3. The National Association of Pension Funds (NAPF) will provide the secretarial and financial support to the WRIC. The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,200 pension schemes with some 15 million members and assets of around £800 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.
4. Learn more about the WRIC online at www.wricommission.org.uk/wric and follow the WRIC on Twitter, Facebook and LinkedIn.
Contact:
Press@wricommission.org.uk

Responding to the launch of the Workplace Retirement Income Commission, Minister for Pensions Steve Webb said:

“The Coalition agreement included a commitment to reinvigorating occupational pensions and I welcome the establishment of this Commission and look forward to further contributions to this important debate. I hope that interested parties will get involved and inform the Commission’s deliberations.”

An independent Commission spearheaded by former Treasury Select Committee chairman Lord McFall will investigate why the pensions system is failing so many working people, and ask how the UK can radically change its approach to saving for retirement.

The Commission launch comes as a YouGov poll for the National Association of Pension Funds (NAPF) reveals that 84% say our society needs to rethink how it saves for its old age, while 79% say the UK needs a simpler pensions system.

The UK is facing a growing retirement crisis as people live longer but continue to save too little. Today’s poll also shows that 43% of people who aren’t retired say they cannot afford to save for retirement. And over half of those who aren’t retired (55%) are not confident they will have enough money in their old age.

Announcing the Commission Lord McFall said:

“Half the workforce is on a collision course with a long retirement spent in poverty. It’s unacceptable that so many will head into old age worried about how they are going to get by.

“A greyer Britain is one of the biggest challenges our society faces and there’s a huge gap in public policy which must be filled. We need to find a sustainable and more universal approach to saving for retirement.

“While the visionary proposals put forward by Lord Turner’s commission will get more people saving for their retirement from 2012, they are the beginning of the reform process, rather than the end.

“Even with auto-enrolment, up to nine million people risk being left behind, and we have to make it easier for everyone to save more. We will look at different types of pension and savings products, tax incentives, and the regulations faced by employers.

“And there’s a big question about whether those who do pay into a pension are saving enough, or are getting a good deal. If the system changed, could they get a better return?

“The Commission aims to shine a bright light on these issues. To understand the problems we will be reaching out very widely – not just to those in business and the pensions industry, but especially to people trying to save for their retirement.”

Lord McFall will chair the Workplace Retirement Income Commission (WRIC), which has been initiated by the NAPF. The Commission will be fully independent, and will seek out a wide range of views and research before making its findings public in October 2011.

The Commission’s final thoughts will be put to policymakers to help the Government meet its coalition agreement commitment to “reinvigorate occupational pensions”. The WRIC is not aiming to make recommendations about public sector pensions, which are being reviewed separately by Lord Hutton.

The five other members of the Commission bring a wealth of pensions, HR, analytical and business expertise:
Graham Cole, currently Managing Director of major manufacturer AgustaWestland.
John Hannett, General Secretary of Usdaw, the UK’s fourth biggest union.
Chris Hitchen, Chief Executive of pension service provider RPMI and former NAPF Chairman.
Paul Johnson, Director of the Institute for Fiscal Studies, Britain’s leading independent microeconomic research institute.
Imelda Walsh, former HR director of Sainsbury’s and author of an independent review into extending the right to request flexible working.

The WRIC will focus on pensions and other workplace savings vehicles. It will ask what barriers to workplace retirement saving exist for both employers and staff, and explore ways of overcoming these.

It will question pension coverage and adequacy as well as the public’s trust and understanding. The Commission will also look at how pensions affect the UK’s competitiveness and labour market, and explore the wider macroeconomic role of the capital generated by pensions. The full consultation document can be seen at the WRIC website www.wricommission.org.uk/wric

Notes to Editors

1. Survey figures are from YouGov Plc. Total sample size was 4177 adults. Fieldwork was undertaken between 21.01.11 – 24.01.11. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+). The full questions and their responses are attached, or are available from the NAPF press office.
2. The NAPF will provide the secretarial and financial support to the WRIC. The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,200 pension schemes with some 15 million members and assets of around £800 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.
3. Learn more about the WRIC online at www.wricommission.org.uk/wric and follow the WRIC on Twitter, Facebook and LinkedIn.

Contact:

press@wricommission.org.uk