Scottish WidowsWorkplace Pensions

ReportSeptember 2012

Document info

Form 49952

Job ID 034376

Size A4

Pages 20

Colour CMYK

Version AUG 12

Operator info

1 CR 17/8/12

2 CR 24/8/12

3 ALI 30/08/12

4 CR 4/8/12

5 CR 5/9/12

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1

IntroductionThe biggest pensions shakeup in a generation isabout to get underway as the UK’s largestcompanies prepare to automatically enrol theirstaff on to a workplace pension this October.

However many people are still in the dark about thesehuge changes which will be rolled out to all otheremployers over the next five years, eventually affectingnearly 19 million workers.

One of the most alarming findings is that awareness isparticularly low amongst those on lower incomes –precisely the people the scheme is targeting.

Auto-enrolment has the potential to engage parts of thepopulation we have collectively failed to reach in the past– but this can only be achieved if we as an industry offerthe transparent and simple products consumers demand.

As the designers and manufacturers of those productswe need to meet that demand – and not because theregulatory world is going to ask it of us, but because it iswhat our customers want. So the Retail DistributionReview, whilst challenging for many in our industry, willprovide clarity and transparency for customers seekingadvice and play a vital role in bridging the nationalsavings gap.

While it is a positive sign that people are willing to paymore into their workplace pension, substantial workmust still be done to encourage people to save enoughfor retirement and this is a challenge for government,the pensions industry and employers.

As a nation we are slowly waking up to the reality ofhow we are going to be able to fund our retirement,with many people recognising that they can’t solely relyon the State to provide the majority of their income inold age.

But will the auto-enrolment reforms, the roll-out of theRDR and a focus on simple transparent products crackthe nut on achieving better outcomes for consumersand narrowing the UK’s long-term savings andprotection gaps?

We have certainly seen a step in the right direction,however even greater action is needed. We believe jointaction is required across Government, regulators andthe industry to make the significant in-roads to themass under-provision that currently bedevils the UK.

The Scottish Widows UK Workplace Pensions Report isbased on an online sample of 5,200 UK adults and isone of the largest surveys undertaken into employeeattitudes on pensions. The research was conducted byYouGov and forms part of the Scottish Widows ongoingconsumer research programme which aims to betterunderstand the context within which people plan fortheir retirement.

Lynn Graves Head of New Business Development, CorporatePensions Scottish Widows

Part 1: The importance of workplace savings

Now, more than ever individuals understand that they need to take more personalresponsibility for their financial security in retirement. Only 2% of those employees who have no pension feel the State will provide sufficient income in retirement.

A key element of an effective retirement solution is access to a company pension scheme.It has been a long term view that this benefit acts as an incentive for workers to stay withtheir employer and our research continues to support that.

This section will discuss the shift in responsibility from State to individuals, the importanceof a company pension scheme and the expectation of employers to offer suitable retirementsaving options.

Current expectations

Over two-thirds (70%) of employed respondents arelooking to retire by the age of 65 and almost half (48%)are looking for an annual income in retirement ofbetween £15k and £30k.

Chart 1 below shows when asked which vehicles will helprespondents ensure they have a reasonable standard ofliving in retirement. Pensions and cash savings havecontinued to come out on top. The survey also reveals a continued trend in the variety of retirement savingsvehicles and a shift away from reliance on the state,which is change in direction from last year’s results. Thetrend over the last three years also shows respondentsare using these savings vehicles less, showing the ability or desire to save is reducing.

Chart 1: Thinking specifically of retirement which of thefollowing do you think will help ensure that you have areasonable standard of living?

2012 2011 2010

State Pensions(s) 40% 50% 45%

Cash savings, includingCash ISAs

34% 44% 33%

Company Pension(s) 33% 40% 47%

Personal Pension(s) 32% 35% 35%

Income from property‘downsizing’/sale/rental

21% 28% 31%

Inheritance 16% 22% 24%

Spouse/Partner’s income 14% 22% 18%

Investment bonds,endowments, equity ISAs

9% 15% 10%

2

3

al es

scheme. ay with

portance tirement

which of the ou have a

Individuals are becoming increasingly aware they need todo more to maximise their outcomes at retirement, with74% of respondents understanding they need to takemore personal responsibility for their financial security,as illustrated in the chart below.

Strongly agree32%

Somewhat agree 42%

Neither agreenor disagree

14%

Somewhatdisagree

4%

Stronglydisagree

3%

Don’t know6%

2010

45%

33%

47%

35%

31%

24%

18%

10%

The role of an employers

When asked which financial products respondents wouldlike to access via their employer, the most popular answerby far is a pension.

Chart 3: Which, if any, of the following financial productswould you like to be able to access via your employer?

Further endorsement of pensions being seen as a keyemployee benefit is the number of respondents statingtheir company pension scheme is an incentive to remainwith their employer. Of those with a defined benefitscheme, 90% see their pension as a major or minorincentive, as do 84% of workers with a definedcontribution scheme. Along with basic pay, holidayentitlement, location and feeling of wellbeing in theworkplace, a quality pension is ranked by 35% ofrespondents as one of the most important benefits to consider when looking at changing employer –reinforcing the long held belief that employee benefitsaid recruitment and retention.

Pensions 39%

Cash ISAs 17%

Mortgage 15%

Loans 14%

Other savings accounts 14%

Other investments 8%

Equity ISAs 7%

Credit cards 6%

Chart 2: Over the coming years, INDIVIDUALS in theUK will be required to take more PERSONALRESPONSIBILITY for their financial security in retirement.

4

Part 2: Optimising outcomes at retirement

When looking at non-pension savings, 54% of respondents have either have no generalsavings or don’t know how much they have. Specifically focussing on pensions, the surveyshows 38% of respondents are either not saving or don’t know whether they are savinginto pension scheme.

We asked respondents where they expect their retirement income to come from; 64% of non retired respondents with partners cited they expect their joint or individual savingsto be their primary source of income. These figures illustrate the importance of savings, butthe results above show many are currently not saving at all. Preparation is therefore currently conflicting with respondents' expectations, showing a strongrequirement for education on long term savings.

Preparation

On asking whether employed respondents are adequatelyprepared for retirement (in terms of their perception), theresults show 54% stated they are not prepared comparedto 51% from last year’s survey. People are fairly realistichowever concerning income change pre and postretirement, with 43% of non retired respondentsexpecting their income to reduce by more than 25% in retirement.

We questioned retired respondents on whether theirlevel of income is in line with their expectations, and the results show more people are disappointed withtheir level of income when they reach retirement, thanpleasantly surprised.

Chart 4: To what extent is your retirement income inline with your expectations BEFORE you retired?

Most of the current retired population are receiving a different make up of retirement income compared to those yet to retire. Those currently retired are morelikely to receive their income from a combination ofState pension, and in many cases income from a defined benefits scheme. As defined benefit schemesbecome less prevalent, the income gap between whatis acceptable and the reality of retirement income isonly likely to increase. It is only by acting now and re-establishing the savings habit amongst the currentworking population that we can hope to arrest this trend.

A lot more

A littlemore

Same A littleless

A lotless

%

Don’tknow

0

10

20

30

40

50

5

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Motivation

So, what motivates people to start saving into a pension?The chart below shows the top 5 results from this year’s survey:

Chart 5: The main reasons why you started/would startsaving into a pension FOR THE FIRST TIME?

Fear and a natural association with the workplace arecited by respondents as key reasons for saving. Pensionsare naturally related to the workplace and thereforeopportunities to encourage people to save need to starthere with employers offering a suitable pension scheme.Life events are not a significant trigger for motivatingpeople to save. When asked whether marriage prompted a discussion around funding retirement, 80% ofrespondents said no.

Current defined contribution schemes require moredecisions to be made by members than defined benefitsschemes. Members have to take more responsibility formaking a real impact on their retirement savings, thereforecommunication has to be very high on the agenda for adefined contribution scheme to be effective.

If employees do not understand how their current benefitswork, it can create a huge obstacle when communicatingpension changes. Employers should not overestimate whatemployees know and start with the basics to helpemployees understand the whole process and how it paysto participate in planning for retirement.

Don’tknow

General fear of not having

enough in retirement

Being automatically enrolled into a workplace

pension

%

0

10

20

30

40

Qualifying to join a company pension scheme

Starting work

Deciding to save

long term generally

6

Part 3: Involvement in pension savings choices and the value of advice

Access to financial education and guidance allows people to understand their savingsbetter and make more informed decisions when thinking about their retirement income.When asked where people would go to find information on pensions 30% said they wouldcontact a financial adviser, but on asking all respondents whether they have a financialadviser, 82% did not.

People want to find out more and friends and family is where almost a quarter of peoplego to for information on pensions, perhaps due to trust in the source. There is therefore agreat opportunity for financial advisers, employers and providers to share their knowledgeand help with pension education.

What’s expected from employers?

74% of respondents working full or part time statedtheir employer should provide either full financial adviceor general information about retirement planning.

When asked which types of financial advice they wouldlike access to via their employer, there was a clear top four:

• Access to face to face advice (30%)

• Personal financial health check (28%)

• Information guides (24%)

• Financial calculators and tools (23%)

A combination of an online workplace savings serviceand access to expert advice would help increase educationand understanding of savings, and help employees planbetter for their retirement.

Access to financial information has to be easy and withpensions seen as a somewhat complex subject in mostpeople’s opinion, engagement is key. More communicationaround employer contributions and tax relief could helpeducate employees on what they’re missing out on.

Respondents were asked which methods ofcommunication would work best to help increaseunderstanding of financial products. These are detailedin Chart 6 and show there is an appetite for all mainforms of communications with responses being broadlythe same across each group.

These results show the importance of developing anintegrated communication campaign, making use offace to face meetings, online, written communicationand promotional material to help achieve an effectiveengagement campaign with cut-through.

Chart 6: Some employers aim to give staff informationthat will help them to improve their understanding offinancial products.

Regardless of age and sex, these results are consistentacross all groups. Respondents over 65 years old are lessinterested in email communication or text message andwidows are the group that most prefer face to facemeetings over digital communications. More employeesof large companies cited posters in the workplace andinformation via the company intranet, compared toemployees of smaller organisations, who are less likelyhowever to have access to a company intranet.

Method Format% ofrespondents

Face to Face Via face-to-facemeetings 29%

Online

Via Companyintranet 26%

Online portal 19%

WrittenCommunications

Email 27%

By letter 18%

Text messages(SMS) 3%

PromotionalMaterials

Leaflets in theworkplace 25%

Posters in theworkplace 14%

7

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Role of the adviser

We asked respondents who have a financial adviser (15%of the 5,200 sample) to rank the products they havediscussed with their adviser. As the chart below shows,pensions came out on top, with 49% of people havingdiscussed a pension with an adviser.

Chart 7: You said you currently have a financial adviser.Which, if any, of the following financial products haveyou discussed with them?

As discussed earlier in this section, access to face to faceadvice is a preferred means of obtaining financialinformation. Due to costs associated with the face toface service offered by advisers, we see this mosteffective form of advice being the most costly. The costof advice is important, because when this is paid for outof the pension fund, it reduces the value of the pensionat retirement. This could create a tipping point wherethe value of advice is greater than the effect that thecost could have on the pension. Therefore, for lower paidemployees, although face to face advice might bedesirable, it probably isn’t a sensible option given thecost, and therefore attractive alternatives need to befound.

We will go on to talk about auto-enrolment in the nextsection, but it’s important to highlight that only 1% ofthe respondents aware of automatic enrolment foundout about the legislation through a financial adviser; 61%cited the news / media and 16% via their employer. These figures show the opportunity for advisers to shareexpertise with their clients as 30% of respondentswould in the first instance, contact their IFA forinformation on pensions.

Pensions 49%

Cash ISAs 47%

Other investments 41%

Mortgage 41%

Other savings accounts 38%

Equity ISAs 30%

Property 16%

Other 7%

8

Part 4: Readiness ahead of auto-enrolment

Automatic enrolment will start to become compulsory for large companies from Octoberof this year, and will continue to roll out to all other employers over the next 5 years.As previous sections of this report have discussed, people are aware they should bedoing more to save for their retirement, but they don’t necessarily know exactly whataction they should be taking. Will auto-enrolment prove to be the solution?

Awareness of auto-enrolment

61% of non retired respondents think auto-enrolment is a good idea and out of those respondents the mostcommon reason for thinking it is a good idea is becauseit will force them to save (42%). The industry needs tobe doing more to raise awareness of the need to savefor retirement, providing education and guidance to the masses.

All full and part time employees were asked whetherthey were aware of auto-enrolment and just 39% saidyes. Awareness levels are higher amongst those whocurrently have a pension with only 28% of employeeswithout a pension aware of the legislation. The surveyalso revealed the larger the organisation therespondents work for, and the higher the salary, thegreater their awareness.

Chart 8: Those respondents who are aware of automaticenrolment.

Automatic enrolment is largely designed for smallemployers and the low paid i.e. the type of peoplewithout a current pension scheme. The results from oursurvey show awareness of automatic enrolment is lowestamongst the target market, therefore information is still notreaching the audience it’s intended to target. Althoughautomatic enrolment won’t affect small firms until 2015 orlater, the lower paid working for large employers will beaffected from October of this year, therefore educatingthese employees needs to be a top priority for the industryand the government.

As explained in the previous section, the media iscurrently the main source of information for respondentsto find out about automatic enrolment legislation.

Chart 9: How did you become aware of automaticenrolment?

The news/media 61%

My employer 16%

Government or other regulatory body 5%

Friends 3%

Internet search 2%

Pension provider 1%

Family 1%

My financial adviser 1%

Employer’s financial adviser 0%

Yes No

%

0

10

20

30

40

50

Not applicable – I already have a

pension arrangement through my employer

Don’t know

9

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61%

16%

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3%

2%

1%

1%

1%

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In order to ensure the country can look forward to anacceptable level of income in retirement and to help closethe gap in our public finances, we need the media to playa positive role in helping make automatic enrolment asuccess, by ensuring that key educational messages areprominent over the next few years. Media and financialcommentators must also be careful not to undermine trustin automatic enrolment pensions.

Impact of auto-enrolment

Of those surveyed, 13% of non retired respondents statedthey don’t think automatic enrolment is a good idea. Forthose not in favour of automatic enrolment, the mostimportant factor cited is the ability to afford the monthlycontributions. This response is consistent across employeesfrom all sizes of companies.

Chart 10: What is the main reason why you DO NOTthink automatic enrolment is a good idea?

However, only 11% of employed respondents said theyintended to opt out of their employer’s pensionarrangement, with the main reason again being lack of money for contributions (32%).

Chart 11: Are you likely to choose to stay automaticallyenrolled in your employers pension scheme?

As the above table shows, 30% of employed respondentsalready have a pension arrangement, but even withouttaking them into consideration, only 1 in 7 of those forwhom automatic enrolment is likely to be applicablewould intend to opt out.

Unsurprisingly, looking at responses by age, respondentsover 55 years of age are less likely to stay enrolled thanother age groups, perhaps due to their closer proximityto retirement. More full time workers think automaticenrolment is a good idea compared to other groups,perhaps due to their higher level of earning.

When asked what the average amount would be for thosewilling to pay into their automatically enrolled pension,a figure much closer to the 5% of income (including taxrelief) was cited. Last year the average amountrespondents were willing to pay was £37.50 per month,and this year it has almost doubled to £76.95 – showing a substantial shift in understanding of levels of paymentrequired. However, based on this level of contribution, athird of respondents feel this would not provide them witha comfortable retirement, as 33% agreed they would stillhave a gap in their retirement savings to reach anacceptable living standard. The industry can help peopleunderstand what they need to do to close the savings gapby providing simple planning tools, better education andengagement and providing easy access to low cost advice.

I can’t afford it

I will get my

pension fund through other

methods

%

0

10

20

30

40

The government

should provide for

my retirement

Not sureOther

Yes No

%

0

10

20

30

40

50

Not applicable – I already have a

pension arrangement through my employer

Don’t know

10

Part 5: Small pots

The Department of Work and Pensions (DWP) have been exploring options for individualsto take their pension pots with them when they leave an employer. The current regulatoryframework makes it difficult for people to do so and our research sought to explorerespondent’s appetite to move small pension pots and where their small pots should bemoved to.

The chart below shows 56% of the non retiredrespondents said they would want to move the moneyaccrued in their pension into a new pension when theyleave their job.

Chart 12: Please imagine you are leaving a job whereyou have accrued a small pension pot. Would you wantto move the money accrued in your pension to a newpension when you leave the job?

On asking respondents whether they would prefer to taketheir pension pot with them to their new employer, orhave it moved into a pension scheme selected by thegovernment, just under a third said they aren’t sure; only15% prefer their pot to be moved into a governmentselected scheme; and 59% prefer their pot moves withthem to their new employer.

Whilst our survey did not explore the movement of small pots in detail, consumers need to be aware of the following:

• Some existing pension pots may contain valuableguarantees

• The charges on an existing pension pot may be lowerthan those in the new employers scheme

• The investment returns in the existing pot may bebetter than the new employers scheme

The DWP are now working with the industry on thedetail of how we can make the small pots initiative workeffectively and in the best interests of employees. It willbe important to ensure that safeguards are built in, whichprevent an over mechanical approach leading toemployee detriment.

The ultimate aim of the review by the DWP is to ascertainthe best way to help people keep track of their pensionsaving and avoid missing out on valuable retirementincome. Our results support this and show more than halfof respondents want to move their pot and would like totake it from employer to employer, rather than it beingheld centrally.

Yes 56%

No10%

Not Sure 35%

11

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Part 6: Recommendations

Make it easy for employers to promote pensions

Employers must be given every encouragement to providepensions that deliver clear value to their staff. Pensions arestill seen as the key retirement savings tool and many viewa workplace pension as the main method of deliveringa retirement income. For those who have one already,a quality pension scheme and access to financial educationand advice continues to be perceived as a valuable, butexpected employee benefit. For the many companiesand their staff that will be coming to pensions for thefirst time educating staff on the importance of retirementplanning should be a key priority. It provides anopportunity to engage with staff, acts as a recruitmentand retention tool and offers support in helping staffprepare for their future. In helping employers deliver thisgoal, the Government and industry must make it simplefor employers to deliver retirement savings. The pensionsindustry has an important role to play in this, particularlyin providing employers with tools to educate their staff.The Scottish Widows mymoneyworks facility is a goodexample of what can be achieved.

Raise awareness of the new market environment

Advisers have a key role in the expanding engagementpiece. Advisers should offer a flexible post-RDR model toensure employers and employees are provided withappropriate guidance and advice at all levels. However,more people want financial advice than have access to a financial adviser at present. This represents an advicegap which is likely to grow as a result of RDR. The solutionto this lies in the industry finding new ways of gettinglow cost advice to employees on an industrial scale. Withinthis, there is likely to be a role for the Money AdviceService and the Pensions Advisory Service alongside thecurrent regulated advice market.

Automatic enrolment

Our report shows although more work still has to be donein raising awareness of automatic enrolment, the goodnews is the amount workers are willing to pay into theirworkplace pension has doubled since last year; and only11% of employees see themselves opting out of theiremployers scheme post automatic enrolment.Replacement rates need to be highlighted to employeesto understand how their income in retirement comparesto a proportion of their income in working life. Asemployees on a lower income will obtain a largerproportion of their income in retirement from the StatePension, saving into a private pension may be lessimportant for them compared to those earning a mediumto high income. For many, automatic enrolmentcontribution levels won’t provide enough income atretirement. The industry needs to focus on helpingemployees understand what else they can do to close the‘expectation gap’ using simple and effective means.Communication messages should focus on tax reliefoffered by saving into a pension and staff potentiallymissing out on employer contribution. Affordability andprofiling tools should be part of the solution as well asresources to help individuals understand what the impactof not saving will mean to them. Awareness of automaticenrolment is lowest amongst its target audience – smallfirms and the lower paid. Employers, advisers and providersneed to continue to recognise their responsibilities toeducate employees at all levels, provide guidance andadvice and offer suitable and effective workplace savingsproducts. The Government also has a responsibility forincreasing awareness, and we welcome initiatives to dothis over the next few years.

12

Industry views

Currently eighty six per cent of private sectoremployers don’t offer a pension scheme to whichthey contribute . Around thirteen million employeesare not saving into any kind of pension . Automaticenrolment and the workplace pension reforms as awhole are a once in a generation opportunity tomake saving for a pension at work the norm.

The way in which we communicate about workers’ newrights under the reforms will be critical to their success.We believe our members deserve clear communicationabout what’s happening to their money and we knowthat many of them will actively seek out information onNEST, on automatic enrolment and on pension saving ingeneral. Fundamentally, our research shows that almostnine in ten workers in our target group check everysingle payslip and will want to understand why itcontains a new deduction.

Our research shows that while many people recognisethey are not doing enough, they do not respond well toscare tactics or being told they ought to be doing more.Constructive messages about what they can do to putthe situation right and what they stand to gain work muchbetter. People also struggle to project themselves into oldage and to think about the future. The challenge is tobring messages about pension saving into their currentworking lives.

To start to get the message across early, we’ve beentalking with the general public through traditional andsocial media to encourage them to think about whytomorrow is worth saving for. We found that over 65sare more likely to be going out for meals, going out withfriends and generally enjoying their free time than anyother age group over 24. But future generations cannottake for granted the ability to pay for these things whenthey get to retirement. Our campaign aims to raise

Tim Jones, Chief Executive, NEST

awareness of NEST and automatic enrolment whilereminding people in a positive, fun and constructive wayof why saving into a pension is important.

We’ve asked the public to take part in a competition tocome up with ideas about the things they enjoy doingtoday, such as going to the cinema or going out withfriends, which they’re still going to want to do in laterlife. The winning idea will be turned into a national advertlater in the year to celebrate the start of automaticenrolment and the role NEST will play.

The information workers get from their employers will alsoplay an important role in aiding understanding.Communications in the workplace will make people reallystart to take notice of how automatic enrolment couldhelp them save for retirement and people tend to listen tothe views of others they work with. If they do not feel theyhave been adequately informed, we have found there is arisk they will respond angrily and some will opt out eventhough this could be against their best interests.

All employers have a duty to communicate with their staffabout their new rights. We can help them provide thatinformation in compelling and interesting ways that makepension saving relevant to people’s lives. We are workingwith our volunteer employers and those preparing forautomatic enrolment to build a suite of communicationmaterials they can use to reach their staff and get theirbusinesses ready. This includes the creatives the public hashelped us develop as part of our consumer campaign.

The recommendations in this report are an invaluablecontribution as our industry faces up to the challenge ofautomatic enrolment. Providers, employers and advisersall have a vital role to play in communicating with millionsof people who will be saving into a pension for the firsttime and we look forward to working with our colleaguesacross the industry to meet this challenge.

13

Someone born in the UK today can expect to live TheUK is sitting on a demographic ticking time bomb.Birth rates have fallen by almost 30% over the past 40years. Those born in the 21st century can now expectto live 30 years longer than someone born a centuryago. Compared to today, the number of people over65 will be half as many again in 2030, and will havedoubled by 2060. In this context, action is needed toguarantee the sustainability of our retirementsystem. This means combining longer working liveswith higher rates of saving.

The Pensions Act 2008, which introduced auto-enrolment,will go some way to addressing this latter challenge. Theforthcoming Pensions Bill should – if it is designedappropriately – help on both counts by extending workinglives and giving people clarity about what the state willprovide. Our pensions system is complex. Its foundationswere laid over a century ago and since the 1960ssuccessive governments have changed elements of boththe state and private pension system. The current threetier system – Basic State Pension (BSP), Second StatePension and private pension – combined with the myriadadditional benefits pensioners can claim – createssignificant uncertainty for people trying to understandhow much income they will receive in retirement, andtherefore how much they need to save during theirworking life to achieve a good income in retirement.

So the Pensions Bill – which aims to create one singleState Pension – is timely. From October this year, auto-enrolment will get many people saving into a workplacepension scheme for the first time in their life. To supportauto-enrolment, CBI members believe a simplification ofthe current State Pension regime would be a positivestep. Giving people greater certainty about how muchincome they will receive from the State means they willhave a clearer picture of how much they need to save

privately, in the most part through the scheme providedby their employer. People should take responsibility fortheir retirement and take ownership of the tools thatwill allow them to save adequately for a pension.

All these changes in the pensions landscape offer anopportunity for employers to look at their wider rewardpackage. Employers need to ensure that they are finetuning their reward package to the needs and demandsof their employees, so they are able to recruit and retainthe best talent available. With personal incomes underpressure, we are seeing a greater appetite for a mixtureof long-term and short-term saving options being availableto employees. This allows them to save for their retirementalongside more immediate needs, such as tuition feesrepayments or buying their first home. This more tailoredresponse could also be the answer to the much-debatedchallenge of getting people more engaged with theirpension, including investment performance, to deliveran adequate income in retirement.

Jim Bligh, Head of Labour Market and Pensions Policy

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14

Our pensions system is bust. Many private sectorworkers have no idea how little they can expectwhen they retire, given that more than two out ofthree private sector workers are not contributing toa workplace pension.

They are the victims of a strange consensus that persistedthrough Conservative and Labour governments. Whatjoined them together during the 1980s, 1990s and thefirst years of the new century was a belief that the mainresponsibility for securing post-retirement income lay withthe individual. Huge sums were spent through tax reliefmainly incentivising higher rate tax payers. The basic statepension withered against earnings most years. The statesecond pension evolved from an income related elementfor those outside good DB schemes into firstly a poorvalue DC pension and then into a flat rate top –up.

Of course there were differences too, particularly aboutthe generosity of means tested benefits. Both partiesgot the blame at various times for the staggeringdecline of DB, through tax or regulation changes. Nodoubt alternative policy options may have helped, evenif a more convincing explanation has more to do withchanges in the wider economy through globalisationand the cult of short-term shareholder value.

But this is the year that we can start to repair this brokensystem. The introduction of auto-enrolment follows thegeneral acceptance of the Turner Commission’srecommendations. Indeed we can start to see theelements of a new consensus about at least thearchitecture of pensions.

Firstly the state pension will be more generous as it ismade fairer for women and relinked to wages. CombiningS2P with the basic state pension goes with the grain ofthis new emerging consensus. Whether it can be donefairly on a cost neutral basis and overcome the anger of

current pensioners who will not gain remains to be seen.

Secondly every worker will have access to a workplacepension, and will be auto-enrolled every three years. Themarket failure to provide decent pensions for the lowand medium paid is rectified by the creation of NEST.

Thirdly much onus remains on the individual as theminimum contributions required will be minimal evenafter the protracted staging and phasing regime. Basingcontributions on an earnings band eases the introductionof auto-enrolment in many ways, but does not helpeither the low or better paid build up the pension theymight expect.

But describing this as a consensus should not close downdebate. It merely gives us some ground rules for whatneeds to be a passionate debate about how to make itwork for the best. How can we improve DC pensionsthrough scale and member-aligned governance? Can weshare risk and define ambition? How do we persuadepeople to contribute more? Will we need compulsion ifauto-enrolment doesn’t deliver enough savings? Is thesteady increase in state pension age simply turning a largegroup of economically inactive people in their 60s frompensioners to unemployed?

That’s more than enough to keep the pensions debategoing for at least another few decades.

Nigel Stanley, Head of Campaigns and Communications for the TUC

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2012 is a pivotal year for pensions and the start of the new dawn that we have all been waiting for since the Pensions Commission presented itsreform recommendations in 2005. The advent of auto-enrolment will open up pension saving to an estimated 8m additional employees. This is alandmark reform that starts reversing the declinewe have seen in good quality pension provision.

But getting people saving is only part of the answer. We also need to ensure they are contributing enoughand saving in the right pensions.

The vast majority of the new savers will be in DC, sothat’s a good place to start. In the trust space we have a large legacy of very small schemes that do not reapthe benefits of providing pensions at scale, while thecontract-based space suffers from a lack of governance.To my mind this is not a debate about the merits orotherwise of trust versus contract, it is about developing a pensions system that puts the member at its heart – a system that protects the consumer and delivers goodmember outcomes.

But workplace pensions face a unique problem: whereelse do we have two regulators regulating essentially thesame thing? Having both the Pensions Regulator and FSAoverseeing DC just creates confusion and regulatorymismatch, and the first step to improving the systemmust be to bring all forms of pension under the auspicesof a single workplace pensions regulator. But we alsoneed to get the regulatory framework right. The PensionsRegulator’s work on DC is a good starting point, but ourregulatory system needs to create alignment betweenthe provider and saver through strong governance anddeliver value for money through scale. Only then will ourindustry be able to start improving confidence and reallydelivering for members.

Then there is the issue of contributions. 8% is a greatstart, but we all know it is not enough. People will needto recognise that a decent retirement income meanssaving more – a difficult message in tough economictimes. Coupled with the Government’s plans to reformthe state pensions system, good levels of contributionswill mean that people can save with confidence, knowingthat their savings won’t be eroded by means testing.

Finally, there has been much talk recently about SteveWebb’s ideas of defined ambition. This is welcomeand is a debate that we should have been having yearsago. We have to move away from our current “twobucket” approach to pensions regulation and allowsolutions to develop that allow for proper risk sharing.We will need to learn to walk before we run on thisone and any evolution to the middle ground will taketime – but we owe it to future generations to try tomake risk-sharing work and deliver better outcomes forscheme members.

One thing is for sure, we are still at the start of thejourney rather than the end. And if we are to have apensions system that is fit for purpose there is still a lotthe Government, regulators and industry need to do todeliver. It is going to be a busy few years

Darren Philp, Director of Policy, NAPF

15

The case for tackling the UK’s decline in pensionsaving is compelling. Millions are not saving enoughto achieve the retirement income they want, whilelife expectancy continues to increase. It is greatthat we can expect to live longer and fuller livesthan previous generations, but the challenge ofensuring financial security in retirement for anageing population is increasingly acute.

The Coalition Government are committed toreinvigorating pension saving and have set out a wide-ranging strategy, including a revised approach to providing tax-relief and greater flexibility in accessing savings in retirement.

Under the ‘triple guarantee’, the state pension willincrease by the higher of earnings growth, priceinflation or 2.5%, and we are consulting on how thestate system can be simplified and improved. Our aim is that the state provides a decent basic income, whichsupports people in planning for their retirement andimproves incentives for people to save, with the statepension age increased to 66 to ensure financialsustainability.

But the state cannot meet people’s aspirations on its own.We are also reforming workplace pensions through theintroduction of automatic enrolment. This will ensure allqualifying workers have access to a workplace pension andovercome savings inertia by requiring an active decisionnot to save. We have established “NEST”, a trust-basedpension scheme to ensure every employer has access to suitable, low-cost pension provision.

The reforms include a new mandatory employercontribution, rising to 3% of a band of earnings by2017. This provides an incentive for workers to continuesaving and, with a minimum employee contribution and tax-relief, will result in a minimum of 8% of bandearnings going into pension saving. Many people willneed to save more, and they can do so if they want.

Our priority is to introduce the reforms in a way that bestmanages the scale of change for all concerned. Once thereforms are in place, how we encourage people to savemore will be very much on the “to do” list.

We are working on a number of knotty issues that come with more widespread pension saving, includingenabling people to consolidate their savings andimproving regulatory requirements to enable employersand pension schemes to provide good quality, low costpensions. We have, for example, recently consulted on how to address the regulatory differences betweenoccupational and workplace personal pension schemes,and we are working with the Pensions Regulator toensure the regulatory landscape is fit for purpose.

I’m conscious of the huge support we need fromemployers and pension schemes to make the reforms a success, and I’m grateful for the support the reformscontinue to receive. They are, of course, questions ofdetail we need to debate between us and I look forwardto engaging with you on these.

But the prize here cannot be over-estimated. We have a once-in-a-generation opportunity to revolutionise oursavings culture and ensure that millions of our citizensare able to enjoy security and dignity in retirement.

Caroline Rookes, Director of Private Pensions, DWP

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Scottish Widows plc. Registered in Scotland No. 199549. Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: 0131 655 6000.

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