Yesterday the TUC published the first Pensions Scorecard – our assessment of defined contribution workplace pensions provision. This report is an attempt to capture where workplace pensions provision is now, looking ahead to the implementation of the automatic enrolment reforms but also surveying the extent of the challenge we face.
The scorecard reflects four key trade union objectives for workplace pension provision – all of which we believe are amplified by the shift towards defined contribution pensions:
- All workers should have access to a workplace pension scheme.
- There should be high employer contribution rates – with workers also incentivised to contribute greater amounts into their pension.
- Workplace pension schemes should be governed solely in the interests of members.
- Outcomes from pensions saving should enable decent incomes in retirement.
The report gives a mark out of ten across each of these areas:
Our analysis strongly suggests that defined contribution workplace pensions are not operating as effectively as we would like. The average score, to be exact, is 4.75 – just under half, or perhaps, must try harder.
Membership rates across workplace provision are too low, and those that are in defined contribution schemes tend to have relatively low contributions. Low earners are particularly disadvantaged. Those earning over £300 a week are twice as likely to be paying into a pension as those earning less than that a week. 88 per cent of defined benefit scheme members have an employer contribution rate of 12 per cent or higher, compared to only 21 per cent in trust-based defined contribution schemes, and 13 per cent in contract-based schemes. 70 per cent in contract-based defined contribution schemes, and 47 per cent in trust-based, have an employer contribution rate below 8 per cent, compared to only 5 per cent of defined benefit scheme members.
Automatic enrolment will of course transform membership rates – although the government has proposed raising the earnings trigger to a level that means many low earners will be excluded from the reforms. Average contribution rates are likely to plummet in the wake of automatic enrolment given the very low statutory minimum contributions – although this trend would have to be seen in the context of millions of workers having a legal entitlement to a workplace pension for the first time.
We are particularly concerned about the governance arrangements in defined contribution schemes. Among employees enrolled in defined contribution schemes, 65 per cent are in a contract-based pension scheme (either stakeholder or group personal pension), and 35 per cent are in trust-based schemes, with trustees whose sole job – in theory – is to protect the interests of scheme members. This gap is likely to widen following the introduction of automatic enrolment, as many employers choose group personal pension products for their staff. But even among trust-based schemes, there is evidence that some trustees are not performing their role effectively on issues such as charges – this problem is more pronounced among smaller schemes.