Medium-term savings call after WRIC report

Government and industry need to invent medium-term savings vehicles to enhance the Workplace Retirement Income Commission’s aim of increasing long-term saving, a consultant says.

Hymans Robertson partner Paul Waters said that while there was not anything revolutionary or new in Lord McFall’s report published on Tuesday, he welcomed the commission’s message around the UK needing to be a nation of savers not spenders and making savings products more accessible.

WRIC’s report urged government to focus on the adequacy of savings and work with employers to pilot ways of encouraging people to save more.

Waters said the biggest inroad to staff savings behaviour will be for employers to ensure their plan design switches staff from an ISA-type vehicle  a product they can relate to – into medium and long-term savings after a period of time.

“Employers will continue contributing for staff but that funding can only be paid into a pension, so you have got into the savings habit early. You could still pay into an ISA after that time but the employer will stop funding it for you in favour of a pension,” he explained.

However, Waters said the difficulty is finding a medium-term savings vehicle that has some form of lock in.

He said: “We need something that encourages people to put money in an ISA but is not accessible for five or ten years, and then at that point give an added benefit, such as a save-as-you-earn scheme, to transfer into a pension. The key thing is to get people saving more and not just switch pension saving into short-term saving.”

Waters added this offered scope for a “win-win” situation for government, industry and employees.

The Association of Consulting Actuaries backed calls for wider employer provision and, by and large, much higher contributions into pension arrangements that suit the varying needs of employers, where costs are kept as low as possible and benefits grow as predictably as possible.

ACA chairman Stuart Southall said: "We remain convinced that trust-based, collective arrangements are the best means to deliver good pensions for the majority of employees."

Meanwhile, Barnett Wadd­ingham consultant Malcolm McLean said private sector employers could be persuaded to offer better-than-average schemes to their workers if the government allowed them extra tax concessions, financed if necessary, from the savings made from increased contributions planned in the public sector (£1.2bn in 2012/2013).

Lord McFall said: “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."

Elsewhere, WRIC’s report said government must ensure good value for money by capping defined contribution scheme charges to match the existing limits on stakeholder pensions  of  1.5% per annum for the first ten years, and 1% thereafter – to avoid complaints about ‘mis-selling’.

McFall said: “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.”

However, Association of British Insurers director of life and savings Maggie Craig said: Employer contributions and tax relief add to the value of the pension pot.

Most providers offer charges of less than 1%. This covers the advice and investment expertise needed to make sure people get a decent return on their savings.”

The commission also said the 8% minimum contribution set by the government’s auto-enrolment reforms will not be sufficient for many people and should be increased following the review of auto-enrolment in 2017.

However, the Confederation of British Industry said increasing the minimum compulsory pension contribution is not the right answer.

CBI director for employment Neil Carberry said: “The current plan to introduce a floor of 8% saving from next year remains the best way to ensure more people who can afford to save do so.

"Further increases in the minimum contribution would put employers and employees under even greater financial pressure, and may drive people away from pension saving altogether.”

In addition, the commission called on government to work with the industry to develop new products that help mitigate risk, saying employers must be incentivised to take on a share of pension risk.

Society of Pension Con­sult­ants president Kevin LeGrand said: “The issue of risk sharing is a critical one; employers must get back into the process again, but to do that they must be incentivised, rather than being treated as ‘cash cows’ as they have been in the past.”

The National Association of Pension Funds vowed to take some of the themes unearthed by the commission forward in its own policy work.

NAPF chief executive Joanne Segars said: "2012 reforms are a big step forward but they are not the final answer.

"It's not a blame game, but there's no doubt that the industry, government, employers and individuals all need to pull their weight a bit more.

"DC pensions can and must be improved if they are to carry the expectations of the private sector."

WRIC’s final report was delivered a few months earlier than scheduled (PP Online, 20 July).