UK: Reinvigorating Occupational Pensions: Workplace Retirement Income Commission Publishes Final Report

What? The Workplace Retirement Income Commission (the "Commission"), established to help the Government meet its commitment to "reinvigorate occupational pensions", has published its final report.

So what? Recognising the need for a shift from a society that "spends today and pays tomorrow" to one which saves for the long term, the report contains 16 recommendations designed to encourage retirement saving and restore trust and confidence in the UK pensions system.

The Commission's recommendations

State pensions

1. The Commission welcomes proposals for a simpler, single-tier state pension and urges the Government to move quickly to put in place these new arrangements.

Adequacy

2. From October 2012, new requirements will be introduced, which will mean that employers are required to automatically enrol eligible employees into a pension scheme that meets certain minimum standards. As part of this, employers will be required to ensure that a minimum contribution of 8 per cent is paid into the scheme on behalf of eligible employees (this must include an employer contribution of at least 3 per cent). However, the Commission believes that this minimum contribution will not be sufficient to meet expectations in retirement.

3. Ahead of 2017, the Commission urges the Government to work with employers and the pensions industry to develop and encourage approaches that make it easier for people to save more, such as "auto-escalation" (an approach used in the US, which sees contribution rates rise automatically when an individual's salary rises or when they reach certain age thresholds).

Risk management

4. The Commission sees a strong case for exploring the wider use of risk sharing schemes and urges the Government to show leadership in encouraging and creating an environment in which employers can feel confident and rewarded for taking on risk. It also urges the financial services industry and Pensions Regulator to develop approaches that help to smooth investment volatility for savers.

"At retirement market" and annuities

5. Given the detrimental impact on the consumer, the Commission calls for further work to be done to understand why there is such a wide variation in price for the same type of annuity (i.e. a policy purchased from an insurance company under which the insurer agrees to pay a pension for life) and whether these variations can be justified.

6. The report says that more could be done to ensure that individuals get the best deal when they buy an annuity, including requiring schemes and providers to direct individuals to an annuity "price comparison site".

7. The Commission calls for greater innovation in the annuity market to ensure that income meets spending patterns in later life (for example, by making annuities flexible enough to account for unplanned events such as an unexpected increase in income from inheritance, or the need to draw down income for healthcare costs during retirement).

Charges

8. The Commission recommends that the Government use its regulatory powers to apply stakeholder charge caps to schemes that will be eligible for auto-enrolment.

9. All schemes should be required to disclose costs and charges in a way that is transparent and which shows the cash impact of charges on the pension pot. The industry should develop a code of good practice and the Government should monitor this and consider taking regulatory action if standards do not improve.

Small pots

10. Whilst the main restrictions on auto-enrolment and the National Employment Savings Trust (NEST) will not be reviewed until 2017, the Commission makes a case for lifting the restriction on transfers into NEST before this date for those with small pension pots below a de minimis amount.

11. In the longer term, consideration may need to be given to whether small pots should be defaulted into schemes where they can be managed efficiently, including NEST.

Scale

12. Government and the Pensions Regulator should develop a package of measures to encourage the consolidation of small schemes into larger, better-value schemes to drive down costs and improve outcomes.

Consumer confidence

13. The Commission sees the introduction of auto-enrolment in 2012 as a major opportunity to promote saving and it urges the Government to develop a powerful communication strategy to take advantage of this opportunity.

Trustworthiness

14. The Commission calls for an industry-led drive around disclosure, transparency, clear communication, and driving down costs and charges to help increase consumer trust in the pensions system. It observes that employers are most trusted when it comes to pensions and well positioned to be an intermediary for the consumer. It urges the Government and the Pensions Regulator to "hold the industry's feet to the fire" by making it a priority to promote strong and consistent governance and employer engagement with workplace pension schemes.

Rebuilding employer confidence

15. The report says that employers should be encouraged to engage confidently with their workforce on pensions, including:

• using tax incentives to encourage the provision of independent advice; and
• giving employers a clear "safe-harbour", so that discussions in good faith with employees about pensions would be free from regulatory or legal comeback.

The Commission also encourages the consideration of other forms of saving, such as workplace ISAs and feeder funds into pensions.

Stability

16. The Commission recommends that an independent standing commission on pensions should be established to take the politics out of pensions.

Comment

Given the general consensus that people need to be saving more for their retirement, there is likely to be widespread support for the Commission's recommendations. However, hard-pressed employers will be concerned with the call to increase the minimum contribution rates for auto-enrolment. The introduction of a cap on charges for qualifying schemes so close to the introduction of auto-enrolment could also disrupt employer preparations.

The Commission's recommendations will now be reviewed by the Coalition Government, which must then decide what action to take.

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