Topic: Auto-enrolment

Pension Adequacy: The Pension Saver’s Perspective

Attention is now turning to whether statutory minimum contribution rates, currently set at 8% of band earnings (including tax relief) are sufficient. As far back as 2005, The Pensions Commission thought that 16% of band earnings was the minimum required to reach a target replacement rate of two-thirds of pre-retirement earnings for a minimum earner. 8% was to come from AE with the other half coming from additional savings.

There is a growing consensus that an increase in minimum contributions would lead to an improvement in saver outcomes.  However, little work has been done to date to explore what savers think of current levels, or if savers are even aware they’re expected to save more? Can they accurately assess how much they will need to have saved for a ‘moderate’ or ‘comfortable’ lifestyle? And what do they feel the appropriate response from the government and pensions industry would be?

Our research, which involved talking to people aged 22-55, shows that millions of savers are making the minimum contribution to their workplace pension while a significant proportion don’t have significant savings.

Download our Pension Adequacy: The Pension Saver’s Perspective report

Download our ‘Pension Adequacy: The Pension Saver’s Perspective' report

Mandatory single charging structure could cost membership millions, warns The People’s Pension

The membership of one of the UK’s largest workplace pension schemes could miss out on millions of pounds, with many individual savers potentially losing thousands from their pension pots, if the Government bans auto-enrolment pension providers from using combination charging structures.

B&CE1, provider of The People’s Pension2, has issued this stark warning ahead of anticipated proposals by the Department for Work and Pensions3 which could see all auto-enrolment pension providers forced to introduce a single, flat annual management charging structure.    

The not-for-profit scheme, which provides auto-enrolment pensions to more than five million workers across the UK, uses a combination charging structure to give money back to its members the more they save.

Its charging structure consists of three components:

  • an annual charge of £2.50 – equivalent to 21p a month
  • a management charge of 0.5% of the value of a member’s pension pot each year
  • a rebate on the management charge, giving back between 0.1% on savings over £3,000 and 0.3% on savings over £50,0004

Already, The People’s Pension gives more than a million pounds back to its members every month. As automatic enrolment matures, the number of people benefiting from the rebate on the management charge will grow considerably as will the amount given back, with its total membership projected, based on current calculations, to receive around £34.5 million a year in just five years’ time.

Based on the current combination charging structure, the average earner, saving over their working life with The People’s Pension, could see their lifetime annual management charge eventually fall by more than half to just 0.23%.

But if the Government makes this anticipated move, the pension provider has warned that a saver like this, could potentially lose out on almost £27,000 – around an additional three years’ retirement income.5  

The pension provider has also warned that implementing a universal charging structure only for automatic enrolment pension providers could distort the market, put millions of people saving through auto-enrolment at a disadvantage, and cause pension providers to increase their charges for all members.

Patrick Heath-Lay, CEO of B&CE, said:

“As a not-for-profit organisation, the rebate is an example of how we’re using the money we make to directly benefit our members, helping them to save thousands more towards their future.

“We believe that banning combination charging structures like ours would be a backwards step as it will remove incentives for saving more towards retirement and will unfairly target savers in workplace pension schemes.

“We’re very proud of the fact that we already give back £1 million a month – a figure only set to increase – and we think that it’s only fair to our members that we’re able to continue to do so in the future.”

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Savers are at risk of losing out if Value For Money framework is not included on pension dashboards

B&CE, provider of The People’s Pension1 which serves 1 in 6 workers across the UK, has warned that savers are at risk of losing out if the proposed Value For Money (VFM) framework is not included on pension dashboards.

New research2 from the leading pension provider has found that more than two out of five pension holders (43%) are likely to move their savings from one pension provider to another if they could do so via a website that allowed them to see all their pensions in one place. But more than four in 10 (45%) wouldn’t know what to look for when switching pension providers, which risks them making a decision which could lead to a poorer retirement outcome.

When asked what would influence their decision if choosing to move providers, more than a third of pension savers (36%) said saving money on charges would be a factor, 34 per cent would be swayed by the rate of return promoted by the pension fund, and more than one in 10 (12%) would consider moving to a company with a better website or app.

Following the recent launch of the Government’s consultation of the draft Pension Dashboards Regulations3, B&CE believes that the Value For Money Framework4, currently in development by the FCA and TPR, should be included on pension dashboards to ensure savers have transparent and comparable information before making a decision. It is also calling for the new VFM regulations to be applied to the retail market as well as workplace pensions, following research from The Pensions Policy Institute (PPI) which found a significant charging gap between members of uncapped retail schemes and capped master trusts5.

Commenting on the research findings, Phil Brown, director of policy at B&CE, provider of The People’s Pension, said:

“The Government’s recent announcement detailing further regulations for pension dashboards will allow the industry to take the next big step towards making this hugely important innovation a reality. Our research shows that seeing all their pensions in one place may make it more likely for savers to transfer their savings to one provider, but they have little idea of what to look for to make the best decision for them.

“It’s vital for the FCA and TPR’s Value For Money framework to be clearly displayed on the platform, otherwise savers will not know for sure what’s the right move for them. Pension dashboards have the potential to revolutionise pension saving but this will only happen if consumers are provided with complete transparency.”

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Growing workplace pension pots are a recipe for greater government scrutiny

It’s fair to say 2021 was not a vintage year for many things, but for consultations it was a bumper twelve months. A bumper twelve months for consultations – not only in quantity, but in complexity and the operational demands that policymakers intend to make of pension providers.

It would be tempting to imagine this was mere chance and that this level of activity might reduce – but this, I think, would be extremely optimistic. It is unlikely that we have even reached the highest tide of intervention yet.

This is because workplace pensions are starting to become genuinely significant. Not just for the delivery of future income in retirement but also as flows of investment. Government departments other than the Department for Work and Pensions (DWP) are eyeing up what pension funds could be used to achieve. So far, we have seen a tentative move to encourage pension funds to increase their investments in infrastructure by amending rules relating to performance fees and the price cap. We’ve also been required to help combat climate change by putting in place processes to identify and mitigate climate risk.

Reforms on the horizon

At the same time, the UK continues to pursue a raft of reforms designed to increase engagement with pensions and the value for money obtained by savers. These reforms could be seen as gradually retro fitting the UK pension system while in-flight. Gradually taking us to the place it would, in an ideal world, have been rational to start from, when designing a mass DC-based pension system more than a decade ago.

These reforms include the continued promise of contribution increases, requirements around annual statements and dashboards, pursuing an efficient system for the consolidation of small pots, and the push for smaller schemes to consolidate unless they can demonstrate that they deliver value for money.
There are many wider government policies which could have some degree of impact on workplace pensions, meaning it is very important that the bigger picture is considered with retirement savers’ needs at the heart of any long-term strategy.

The consequence of not having a longer-term strategy in place is less civil service resource being applied to testing a proposition, and thus a greater likelihood of ill-thought through policies. In the pursuit of the short-term advantage drawn from newspaper headlines, there is every chance a policy designed to achieve something else altogether, may be casually allowed to damage the first objective of pensions – which is to provide retirement income.

The interest of departments other than the DWP in the sums held by pension schemes is unlikely to abate. A consequence of Brexit is historically low flows of foreign direct investment. The long-term consequence of Brexit is also lower government revenues than would otherwise have been the case. Simultaneously, the pressures on the UK government to do more to deliver on net-zero will also increase. This is because there is currently very little substance behind its ambitions to deal with the two main causes of UK carbon emissions and deliver either a full roll out of electric vehicles or to deliver a replacement for the domestic use of natural gas. It’s difficult to predict what it will do if it has to deliver last-minute crash investment programmes.

The growing importance of DC pension pots

We are also inexorably moving towards the time when retiring generations are no longer relying on defined benefit (DB) pensions. This will inevitably mean that defined contribution (DC) pensions will become more salient for individuals as part of their pensions. We already know how powerful the politics of the State Pension are in the UK. The intention behind workplace pensions was that mass DC would become the vital bolt-on to the State Pension. We can suppose that in a similar fashion, mass DC will come to hog the headlines too; unsurprisingly, as for most of the population, the DC pension will become the difference between something better or retirement on the poverty line.

We are not yet at the stage where workplace pensions feature as the centrepiece of electoral platforms. More established workplace DC regimes, like that in Chile, are already there. However, we can already see the forces that will propel us in that direction. 2021 was busy, the rest of the decade will be too.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

Landmark anniversaries show how far an industry has come

In 2022, The People’s Pension and auto-enrolment will be 10 years old and we’ve both come a long way in that time.

The People’s Pension now has 5.6 million members and more than £16 billion of assets under management. We’re a core provider in a system which has brought more than 10 million workers in the United Kingdom into pension saving – something that was a dream just a decade ago.

Like many other national workplace pension saving systems, the UK’s auto-enrolment regime is still being refined as it matures. The government has either promised to enact or is considering a range of changes in 2022, which will impact on pension schemes and their members. There are other items which are at the review stage. We also think there are a couple of areas where the government and regulators need to look at how recent rules are being implemented in practice.

Timetable for reforms is needed

The government has promised to change some of the initial auto-enrolment rules to ensure that employees save more towards their retirement. These amendments would lower the age limit for auto-enrolment to 18 and calculate people’s pension contributions from the first pound they earn.
We’re also calling on the government to lower the £10,000 earnings trigger to the lower earnings threshold for National Insurance – of £6,240 – to help 1.3 million more people, the clear majority women, save through auto-enrolment. We hope that during 2022 the government will set out its timeline for making these improvements.

The DWP will also need space in the legislative calendar to pursue another major pension reform. The minister has rightly been pressing workplace pension providers to come up with a low-cost consolidation system for small pots. The outline of such a system is now available. To be made operational, however, it needs the DWP to put in place a statutory framework. Two areas which are not yet ripe for any rule changes but will be under review in 2022, are annual statements and retirement products in workplace schemes.

Learning lessons from abroad

Our wish list for items we would like the government and regulators to look at in 2022 also includes enforcement of value for money and greenwashing investments. The first would, of course, only follow once the government concludes its current work on how to measure it. But the lesson from Australia is that value for money rules only start to have an impact on the market once the pension regulator begins to check that it is being applied rigorously.

Pension schemes are also required to play an important role in combatting climate change. However, without better guidance as to which kinds of investment are genuinely sustainable, there is a risk that competition could drive down standards. Some schemes may be tempted to undertake superficial activity to signal green credentials to customers, where the investment risks releasing increased amounts of carbon in the future.

We look forward to celebrating the two significant anniversaries in 2022, while continuing to work to make the saving experience easier and more attractive for employees.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

All DC pensions should be included in proposed value for money framework, urges B&CE following new PPI report

B&CE, provider of The People’s Pension1, has today backed plans for new value for money regulations to be applied to the retail market as well as workplace pensions, following new research from The Pensions Policy Institute (PPI)2.

The PPI’s latest report, What is the impact on member outcomes of different non-capped charging structures?3, looks at the effect that different charging structures could have on pension savers. The research concludes that while average pension savers are neither engaged or motivated by what they are charged, there is a charging gap between members of schemes that are subject to the charge cap and those who are customers of uncapped schemes.

B&CE believes that the intention from The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA), for a new framework to assess value in both workplace and retail pensions, is the right way forward. The leading workplace pension provider believes savers should have a clear idea about how different pension schemes and products compare and, while charges are very important, this should be broader than charges.

Phil Brown, director of policy and external affairs at B&CE, provider of The People’s Pension, said:

“This research shows how significantly charges can impact retirement incomes. With charges generally lower in workplace pensions than in retail, for many people thinking about transferring out of lower cost workplace pensions, it would be better to stay put.

“But value for money is about more than just charges. The FCA and TPR are right to propose a value for money framework that covers all of DC pensions, as savers should be able to examine the value for money offered by both workplace and retail pensions. It will be tough to fine tune, but it will provide real transparency to both professionals and savers.”

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New Choices, Big Decisions: Pensions Personalities Revisited

Following on from the most recent study in the series which explores savers’ retirement planning and spending habits after the introduction of pensions freedoms in 2015, this follow-on report looks at the seven personalities in more detail.

The ‘New Choices, Big Decisions’ series explores the evolution of consumer decision making and behaviours under Pension Freedoms – as well as its impact on retirement planning and spending habits. In this latest report, we assess how our brave pension pioneers have been getting on in the five years since new freedoms changed the way people think about their pension money.

The respondents in our research had their own unique priorities, beliefs and preferences, but common themes and traits were also evident across these groups. We revisited seven pension personalities, from the Procrastinating Petes and Paulas, who were overwhelmed by the task at hand, to the I can Do Better Colins and Clares, who’d lost all faith in pensions and would rather have the money in their control.

Five years on, they’re no better informed about the risks they face if they don’t want to buy an annuity. They’ve not been using the time to build the skills needed to make good decisions, nor are they seeking appropriate support. There’s a range of behavioural biases at play which have resulted in them sleepwalking into full retirement with very limited financial plans.

Download our ‘New Choices, Big Decisions: Pension Personalities Revisited’ report

Download our ‘New Choices, Big Decisions: Pension Personalities Revisited' report

New Choices, Big Decisions – 5 Years On

Five years on from the introduction of Pension Freedoms, new research by The People’s Pension and State Street Global Advisors has shown that mature savers are sleepwalking into retirement. They risk running out of Defined Contribution pension savings and, with a third of their retirement still to come, could spend their later years reliant on the state pension.

In-depth research by consultancy Ignition House explores both retirement planning and spending habits following the introduction of freedoms in 2015. The study reveals that people nearing retirement want their pension provider to supply a safe, guided path into retirement – rather than the complex decisions with which they’re now faced.

The new research centres around interviews with 50 savers and shows how policymakers, and the industry as a whole, have built a system that relies on unrealistic assumptions around how people behave to work effectively.

Key findings include:

  • Savers are scared of planning for the future as they don’t want to discover the ‘truth’
  • Savers also underestimate the financial risk of growing old and don’t understand how inflation can impact their savings
  • The typical saver follows the path of the least resistance – they won’t leave a product or change a drawdown withdrawal rate once they have signed up

Download our ‘New Choices, Big Decisions: 5 Years On’ report 2021

Download our ‘New Choices, Big Decisions: 5 Years On' report'

Response to small pots report

On Thursday, December 17, the Department for Work and Pensions published the report from the industry’s small pots working group.

The publication of the report and its recommendations is an important step towards small pot consolidation within the automatic enrolment market. The Pensions Minister Guy Opperman MP has indicated he will study the report and recommendations in detail in 2021.

Tim Gosling, head of policy at The People’s Pension, who sat on the master trust expert panel that fed into the working group, said: “This report lays out a workable roadmap for dealing with the small pots problem. The scale of the challenge is significant: without action the problem will become much harder to manage and will destroy value for members. We welcome the Minister’s support for industry to lead on proof of concept trials, including support for the member exchange pilot.”

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