Pensions - DWP proposals and more

Contents:

• DWP proposes simpler Annual Benefit Statements for Pensions
• DWP proposes new regulations to tackle pension scams
• A different look at contribution timing
• Contribution timing in practice

 

 

DWP proposes simpler Annual Benefit Statements for Pensions
(AF3, FA2, JO5, RO4, RO8)

The DWP has published a consultation seeking views on proposed new rules for the length and format of annual pension benefit statements sent to members of defined contribution automatic enrolment schemes.

The changes are part of an aim to improve savers’ engagement with their workplace pensions schemes by making benefit statements shorter, simpler and more consistent.

The proposals aim to enable to make it easy for a member to see:

• how much money they have in their pension and what has been saved in the year;
• how much they could have when they retire; and
• what they could do to give themselves more money at retirement.

The aim is for all the key information to be provided in a statement that doesn’t exceed one double sided sheet of A4. There will be statutory guidance on how the information should be structured and presented.

The consultation states that other helpful supplementary information may be provided, but that information must be in a separate document to the annual benefit statement.

The DWP propose that the new rules should take effect from 6 April 2022.

The consultation closes on 29 June 2021.

 

 

DWP proposes new regulations to tackle pension scams
(AF3, FA2, JO5, RO4, RO8)

The DWP has published a consultation seeking views on a set of draft regulations concerning pension scams. The proposed Occupational and Personal Pension Schemes (Conditions for Transfers) Regulations 2021 would require trustees or scheme managers of occupational and personal schemes to ensure that at least one of four conditions is met before they act on a pension transfer request from a member of their scheme. The regulations would also introduce a new red and amber flag system, allowing for transfers to be prevented or paused whilst the member takes guidance about the possibility of scams. The proposal is that the guidance would be provided by the Money and Pensions Service.

Guy Opperman, Minister for Pensions and Financial Inclusion, said: “Pension scammers are the lowest of the low and, with the growth in recent years of online scams, we must act now to curb them. Our new regulations will build a strong, first line of defence in the fight against pension fraud — helping stop these crooks from making off with people's hard-earned savings.”

The plans outlined by the DWP could see providers asking people transferring to a pension scheme not on a prescribed ‘safe destination’ list a series of questions to determine whether they are at risk of being scammed. This could result in significant delays to transfers:

• The proposal to exclude all SIPPs and personal pensions not operated by insurance companies from the safe destination list means transfers to these schemes could face severe and unwarranted delays.
• Thousands of legitimate transfers to mainstream pension providers could be blocked completely if customers can’t or don’t want to answer these prescribed questions.

The existence of a ‘safe destination’ list may mislead consumers as it implies the DWP has carried out due diligence on those schemes and is endorsing them when that isn’t the case.

The consultation closes on 9 June 2021.

 

 

A different look at contribution timing
(AF3, FA2, JO5, RO4, RO8)

The IFS has recently published two briefing notes on pension saving. The first, which we consider here, asks when individuals should save, while the second examines what happens in practice.

The ‘When should individuals save for retirement’ briefing note is based on an economic model of household saving behaviour, so produces some conclusions that look unusual, especially in a world of auto enrolment (AE):

• Most individuals expect some earnings growth over their working lives. If the economic goal is to smooth their spending over their lifetime, then in theory they should contribute a greater share of their earnings to retirement provision at later ages when earnings are higher. This runs against the pattern of AE, which is close to saving at a constant proportion of earnings throughout working life.
• Households with children are typically assumed to require higher spending to achieve the same standards of living as their childless counterparts. Given this, most parents aiming to smooth their living standards over their lifetime should save relatively more for retirement before their children arrive and/or after they have left home.
• Many recent graduates hold student loans that will be written off after a fixed period (30 years after the April following graduation for those who started at university after 2011). Graduates aiming to smooth their living standards over time should increase their pension saving by the amount of their previous loan repayments when loans are written off. The IFS suggests that there should be some ‘nudge’ mechanism to encourage this.

• Employer pension contributions that are only made if the employee also contributes incentivise individuals to contribute throughout working life, even in years when earnings are relatively low or there are children in the household. However, individuals are likely to want to contribute only the minimum required to receive the employer contribution for the first half of working life. When earnings increase and/or children leave home, they should then markedly increase their saving rate for retirement. Again, the IFS sees these events as a ‘nudge’ trigger point.
• This profile of the appropriate saving rate over working life in the presence of contingent employer pension contributions – flat at the minimum required employee contribution, and then increasing markedly when children leave home – works for assumptions about the real rate of return on savings of between 0% and 5%. For example, allowing for earnings growth, children and student loan repayment, the IFS calculates that for the high earner 83% of lifetime contributions are paid between age 45 and 66, providing 72% of retirement wealth at a 3% real return, 85% at a 0% return and 55% at a 5% return.

• Uncertainty over the future path of earnings deters individuals from leaving all their retirement saving to a short period of time at the end of their working life. In the presence of uncertainty about earnings and employment, individuals should save more at younger ages, particularly years when earnings are high. However, the general pattern remains – that is, many would be expected to save the minimum amount early in working life, and then increase their saving rate substantially when children leave home.

The IFS results may not seem that surprising, but they raise the interesting issue of whether there should be age-related AE contribution levels to encourage higher savings in later life, when they should be more affordable.

Source: IFS Briefing Note BN326: When should individuals save for retirement? Predictions from an economic model of household saving behaviour - BN326-When-should-individuals-save-for-retirement.pdf (ifs.org.uk) – dated 10 May 2021.

 

 

Contribution timing in practice
(AF3, FA2, JO5, RO4, RO8)

Previously we considered the conclusions of an IFS paper on an economics-based pattern of pension saving. These did not sit comfortably with the one-size-fits-all contribution rate of auto enrolment (AE). The IFS was well aware of this difference, not least because it had also undertaken some extensive research on the pattern of retirement saving in the real (mostly pre-AE) world. The conclusions of its briefing note are:

• Before AE, there was an age profile in Defined Contribution (DC) pension saving among private-sector employees, albeit the increase in the contributions as a proportion of earnings through working life was small. Across all private-sector employees, including those not saving in a DC pension at a particular point in time, mean DC contributions are estimated to increase by around 2% of gross pay between the early 20s and mid-50s.
• Much of this increase in was driven by (pre-AE) net movements into saving in a workplace DC pension, particularly among those in their 20s and early 30s. The IFS estimated an increase in the DC membership rate of 10% during people’s 20s, but smaller increases in membership rates with age thereafter.
• Average DC pension contributions among those saving increased steadily but slowly throughout the whole of working life – by around 5% of gross pay between the early 20s and late-50s. This stems from increases in both average employer and average employee contributions – by around 3% and 2% of gross pay, respectively.
• AE has increased private pension membership, particularly among younger individuals. The effect of this will be to have further flattened the age profile of pension saving.
• Comparing the age profile of pension saving as a share of earnings between male and female private-sector employees before AE, average pension saving was broadly similar until the mid-30s, but then diverged sharply as average pension contributions continue to increase with age for men but plateau for women. This created a gender pension gap over and above that arising from differences in labour market attachment or average earnings.

• This pattern was driven by differences in the age profiles of pension membership. Before AE was introduced, male and female private-sector employees were similarly likely to be saving in a pension until around age 30, but then the proportion of saving continued to increase with age for men but not women. The age profiles for average contributions as a percentage of gross pay conditional on being a member of a workplace pension are much more similar (and, in fact, are higher for women than men).
• AE will have changed the nature of the gender pension gap going forwards, by substantially increasing pension membership, and resulting in a difference in pension membership between male and female employees that is more uniform with age. Understanding the drivers of the previous gender pension gap is therefore important for fully assessing AE’s impacts, and the channels through which it affects individuals.

It is interesting to see that the pre-AE contribution pattern was slightly closer to the IFS economic model, which suggests there could be a willingness to accept AE higher contributions with age.

Source: IFS Briefing Note: Life-cycle patterns in pension saving - what happens in practice – dated 11/05/21 (Life-cycle patterns in pension saving - Institute For Fiscal Studies – IFS)

 

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