The Workplace Retirement Income Commission (WRIC) has uncovered widespread concern about the charges, risks and complexity of the pensions which affect a private sector workforce of over 23 millio people, or 80% of all workers. With 14 million currently not saving into a workplace pension, and with 10 million due to start being automatically enrolled into a workplace pension from 2012, the WRIC believes there is an urgent need to improve the UK's pensions system.
Lord McFall of Alcluith, the former Treasury Select Committee chair who led the WRIC, said: "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.
"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. We cannot stand by and let that happen. The complacency of many in the pensions industry is alarming."
The WRIC report raises particular concerns about the defined contribution (DC) pension schemes which are becoming the norm in the private sector as 'final salary' pensions decline. While it believes DC pensions have the potential to be very good, the report highlights seven key 'red flag' areas for the Government, employers, individuals and the pensions industry to focus on.
1. Adequacy - many people who are saving into a pension are not saving enough. And the 8% of salary minimum contribution set by the Government's auto-enrolment reforms will not be sufficient for many people. The Government must now start to investigate how the contribution floor can be increased following its review of auto-enrolment in 2017. In the meantime, the Government should work with employers to pilot ways of encouraging people to save more.
2. Charges - fee structures are too opaque, and high charges can have a big impact on savings. People's money must work for them. First, the Government must ensure good value for money out of auto-enrolment pensions by capping the charges allowed in them. The cap should match the existing limits on stakeholder pensions: 1.5% pa for the first ten years, and 1% thereafter. Failure to do so could leave the Government open to complaints about 'mis-selling'. Second, the UK is unique in having many small, inefficient pension schemes. New structures need to be developed to allow bigger, low-cost pension schemes to operate.
3. Annuities - too many people are being short-changed by their annuity choice, and that single decision can affect them for decades. Annuity rates offered can vary by 25% or more across providers for the same individual and annuity type - to the huge detriment of those consumers who fail to shop around. The Government and industry must ensure the vast majority of people end up with the best value annuity. Annuities should be more flexible so that they meet changing spending patterns in old age.
4. Risk - people in DC pensions are being left to carry all the risk of funding their retirement. They are often confused by investment choices, and are at the mercy of stock markets. The Government must work with the industry to develop new products that help mitigate risk, and employers must be incentivised to take on a share of pension risk.
5. Small Pension Pots - 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. The Government should consider defaulting small pots into places where they can be managed efficiently. This includes NEST, which is currently banned from taking them.
6. Cultural Change - we need to be a nation of savers, not spenders. Savings products must become more accessible. Employers are scared to offer advice about pensions and must become reengaged through tax incentives and the creation of 'safe harbours' that allow them to discuss pensions more thoroughly with staff without excessive fear of legal comeback.
7. Stability - trust in pensions is low and the five-year political cycle does not fit with the long-term nature of pension saving. A permanent, independent pensions commission should be established to take the politics out of pensions.
Lord McFall, said: "Pensions have become a burning issue. The spotlight for reform has rightly fallen on the public sector, but there are critical problems in the private sector as well. "Defined contribution pensions can be very good, but they have to meet the right standards. We need to focus on getting the future right.
"Sadly, millions of people are being left to navigate a pensions minefield that would puzzle Einstein. We're seeing less saving and lower trust in pensions, and that's a vicious cycle that cannot continue.
"Auto-enrolment will help, but it's a halfway point, not the final answer. More needs to be done. We hope this report will be a catalyst for discussion about the bigger picture. "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.
"Annuities stand out as an area sorely in need of a shake-up. People are being shortchanged by the current system, and it's unfair that a miscalculation can haunt them financially for decades.
"Pensions are a long-term issue and the public is tired of short-term tinkering. We need a permanent, independent commission to take the politics out of pensions and restore some faith in the future. "We've brought our publication of this report forward by a few months as the key problems are already clear to us. With auto-enrolment just round the corner there is no time to waste."
The WRIC's conclusions are based on over five months of investigation, consultation and interviews with consumers, the pensions industry and employers across the UK. The WRIC was initiated by the National Association of Pension Funds and launched in February 2011.
The Commission, which is made up of six commissioners, was tasked with finding ways to improve the state of retirement saving in the UK.