The UK is in the midst of an occupational pensions revolution as 10 million people are automatically enrolled in a workplace pension for the first time. Labour started this revolution.
The last Government was the author of auto-enrolment and began the process of exposing rip off pension charges by introducing both stakeholder pensions and the National Employment Savings Trust (NEST), a low cost not-for-profit independent pension provider.
Auto-enrolment is underway but the success of this revolution is not assured. The Government must make it so. After all, the Government’s state pension reform is predicated on the assumption that workplace pension saving will plug the gap in pensioner income that will be created by the flat rate state pension.
So getting auto-enrolment right is crucial. While the early evidence from larger employers auto-enrolling staff is encouraging, this tells us little about what will happen when SMEs begin auto-enrolling. Lacking the muscle, resources and pensions expertise of corporate blue chips the danger is that SME employees – the vast majority of the UK workforce – don’t get high quality low cost workplace pensions.
We must avoid a situation where pension pots are eaten away by costs and charges which boost the profits of pension providers, asset managers and other financial intermediaries of the kind the Kay Review identified.
Employees will opt out if they do not think the new workplace pensions are value for money.
The current occupational pensions market is flawed. It does not operate like a normal market in which the consumer exercises choice. After all, it’s the employer not the employee who chooses the pension plan and employers are – especially in the SME sector – unequipped to negotiate the complexities of pension provision for their staff.
This asymmetry has given rise to a number of practices which can siphon away the value of savings in contract-based schemes: high charges, high transaction costs, passive member penalties, exit fees, consultancy charges, and, annuity rates which fail to match the open market rate.
These can and should be tackled by government. It could do so by legislating directly. It could do so more efficiently by empowering a single regulator held to account by parliament to ensure that abusive practices are ruled out of court.
Regulation is part of the answer. But even more important is to change the incentives of the providers themselves. There are two ways to do this and realign market incentives.
First, the Government should impose a legal requirement that all pension scheme providers must prioritise the interests of savers above those of shareholders. This duty should be policed by trustees who would have a duty to ensure that the pension scheme providers operate in line with a new legal requirement.
Second, the Government should free-up NEST. NEST is managed by independent trustees. It’s existence and the pro-saver approach it has adopted has forced private providers to improve their performance to a degree. However, its effect is limited because of restrictions on its activity. Those restrictions should now be lifted.
Third, the government should also recognize that scale is important in ensuring that pension schemes and their trustees have the ability to negotiate the best terms with financial intermediaries. Changing rules and empowering the regulator to encourage scale has been a focus of the Cooper Review’s recent Australian reforms which are designed to benefit the saver.
We in the Labour Party did not believe that the government would willingly tackle vested interests and embark on these vital reforms. This is why we called for the OFT investigation into the workplace pensions market underway currently and why it is crucial for savers that the Government complete the workplace pension revolution which Labour began.
Gregg McCLymont is Shadow Pensions Minister and MP for Cumbernauld, Kilsyth and Kirkintilloch East