Private sector workers must get a better deal from their pensions if they are to save enough for retirement, an independent investigation by the Workplace Retirement Income Commission (WRIC) warned today

The commission, chaired by Lord McFall of Alcluith, has uncovered widespread concern from the industry about the charges, risks and complexity of the pensions.

Out of a private sector workforce of over 23 million people, 14 million are currently not saving into a workplace pension, says the commission which was initiated by the National Association of Pension Funds in February.

"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," says McFall.

He says people "need to get more bang for their buck" if they are to be encouraged to save for a pension. "The complacency of many in the pensions industry is alarming," he continued.

One of the concerns the commission has regarding private sector pension provision is the shift to defined contribution (DC) pension schemes. These are becoming the norm in the private sector as 'final salary' pensions are being dumped by employers due to their high costs.

Lord McFall, says: "Defined contribution pensions can be very good, but they have to meet the right standards." The commission believes DC pensions do have "the potential to be very good".

But while there is hope for DC, the report highlights seven other key areas for the government, employers, individuals and the pensions industry to focus their attention on.

The first one mentioned in the report is adequacy. It says many people who are saving into a pension are not saving enough.

The report describes how the 8% contribution set as a minimum by the government for next year's auto-enrolment reforms will not be enough for many people. The commission recommends a review of this policy in 2017.

Neil Carberry, CBI director for employment, does not think this is the right answer to the problem. He said: "This level was chosen by Lord Turner's pensions commission to deliver a pension at a level hard-pressed employers and employees could afford. 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."

The WRIC urges the government to investigate how the contribution floor can be increased and to work with employers to find ways to encourage workers to save more.

Another point set out as a 'red flag' are the fee structures that are currently the norm. The charges are too high and have a big impact on savings, says the commission.

It urges government to ensure good value for money out of auto-enrolment pensions by capping the charges allowed. The cap should match the existing limits on stakeholder pensions: 1.5% pa for the first ten years, and 1% thereafter.

The WRIC warms that failure to do so on the side of government could leave them open to complaints about mis-selling.

The commission also says there are too many small, inefficient pension schemes in the UK. It says new structures need to be developed to allow bigger, low-cost pension schemes to operate, as is seen in other European nations such as Denmark, the Netherlands and Sweden.

Another issue highlighted is the defaulting of small pots into places where they can be managed efficiently. This includes NEST, which is currently banned from taking them. "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," explains the commission.

They warn that the general trust in pensions is low and a permanent, independent pensions commission should be established to take the politics out of pensions as "a five-year political cycle does not fit with the long-term nature of pension saving". McFall says he hopes the current report will work as "a catalyst for discussion about the bigger picture".

He repeated what he said to Pension Funds Insider in Februaryby urging all parties to create "a nation of savers, not spenders."

The commission said savings products must become more accessible. Employers who are currently scared to offer advice about pensions must become re-engaged through tax incentives and the creation of 'safe harbours' so that they are encouraged to discuss pensions more thoroughly with staff without excessive fear of legal comeback.

Helping workers to understand and help them mitigate risk, incentivising employers to take on a share of pension risk, and working out clear and fair systems for annuity rates are also amongst the commission's recommendations.

On the suggestion made by the commission for employers to take on a share of the DC pension risk, Carberry said: "The way to drive a change in the savings culture is for employers to have more freedom to design schemes that work for them and their employees. That means simplifying rules and fostering greater employee engagement with pensions, not top-down solutions."

Malcolm McLean, consultant at Barnett Waddingham, said: "It would also help with incentives to save if more employers could be persuaded to offer 'better than average' pension schemes to their workers. Despite all the improvements that the present government has made to pensions in their term of office to date, little if anything has been done to support and encourage good occupational pension provision."

First published 01.08.2011

azeevalkink@wilmington.co.uk