Employers can't cope with picking good pension schemes

Workers could find themselves auto-enrolled into unsuitable pension schemes picked by their employers.

by Michelle McGagh on Sep 10, 2014 at 14:31

Workers could find themselves auto-enrolled into an unsuitable scheme picked by an employer that does not understand the mechanics of pensions.

Since auto-enrolment was introduced in 2012, four million workers have been auto-enrolled into a company pension and many are saving for the first time. This has been heralded as a huge success thanks to low opt-out rates; just 10% of workers have opted out after being auto-enrolled.

Over the next three years the total number of people being auto-enrolled will have climbed to nine million and in 2018 the amount individuals will automatically pay into their pension will total 8% of their salary: 3% from the employer, 1% from the government and 4% from the employee.

With individuals squirrelling more of their salary away over the next few years, there are concerns that the pensions being offered by their employers are not up to scratch.

Pensions expert Henry Tapper, founder of auto-enrolment adviser Pensions PlayPen, said employers were not setting out to deliberately let down employees but that they had little understanding of the schemes on offer.

His concerns echo that of the Office of Fair Trading. In a 2013 report it said the complexity of pensions ‘made it hard for savers and their employers to make good choices’ and that ‘employers choosing a workplace scheme do not always have enough understanding to choose well’.

Tapper is particularly concerned that workers in smaller companies, which will be caught by the auto-enrolment net over the next three years, will be put in an unsuitable scheme because their workplace does not have the resources to research the market fully.

‘It is a serious problem; 8% of your salary is going in to this thing from 2017 and that is for the rest of your life,’ he said. ‘There can be a lot of money in [pensions] and people are relying on it [for retirement]. It matters to the employees that the employer makes the right decision.’

No choice

Unfortunately for employees, they are left the mercy of their employer when it comes to pension choice with little chance to have an input on the process, or change the pension if they don’t like the charges or investment options for example.

While they can transfer their pension money into another pension, an employer will not typically make contributions to a pension scheme it has not picked.

‘’Employees do not have a say in the matter,’ said Tapper. ‘The best they can do is transfer the pension away from the employer but [under the rules] the employer only has to pay in to a pension they choose from you, but you can choose to move the money away into a private arrangement – although you would be stupid to do it if it meant you lost your pension contributions.’

Tapper added that only ‘a powerful person’ in a company, for example a director, could request their employer pay pension contributions into a different scheme but for the average worker the chances were slim.

The Pensions Regulator said employees who had concerns could whistle-blow on their employer. ‘The choice of pension scheme is one for an employer to make,’ said a spokesman. ‘If a worker has concerns about the running of a workplace pension scheme or suspect that contributions are not being made on schedule they…can report that concern to us.’

Better pensions

While employees may not decide what pension schemes are used the hope is that from next year the make-up of schemes will improve and the large fees of some providers will fall.

From April 2015, the cost of auto-enrolment pension schemes will be capped at 0.75%, and may even decrease in the future. The cap will only apply to ‘default funds’ – which savers are automatically placed in if they do not make a decision about where to invest their money – and does not cover ‘transaction costs’, the cost to fund groups of buying and selling stocks.

‘From April 2015 there will be proper rules about what makes a good pension,’ said Tapper. ‘There will be firm rules about how much they can charge and how they display those charges and how those charges are constructed, meaning employers will be able to buy with more confidence.’

Overall, Tapper said more education was needed for employers and employees about saving for retirement.

‘I do not think people have been properly educated. The most they know is that money is going from their salary into their pension and they will be alright. They don’t know what fund they’re using or if they’re contributing enough or how to claim back tax relief if they’re a 40% higher rate taxpayers,’ he said.

‘Asking people about at-retirement solutions and they haven’t got a clue.’

The spokesman for the regulator said it would continue to drive up the standards for pension schemes  but it would not go as far as requesting all employers receive professional advice when picking a pension.

‘It is a matter for employers to decide whether or not they wish to take independent professional advice on their choice of pension scheme,’ he said. ‘As part of our "educate-and-enable" approach we provide information to assist the employer in deciding how to go about choosing a suitable qualifying pension.’