The pensions system in the private sector is ‘significantly flawed’ and will leave too many savers with measly retirement pots, the new Chairman of the UK’s leading pensions body has warned.
In his inaugural speech, Mark Hyde Harrison, Chairman of the National Association of Pension Funds (NAPF), attacked the structure of ‘defined contribution’ (DC) pensions in the UK as inefficient and wasteful.
These pensions have largely replaced final salary pensions in the private sector, and around five million savers now have one. Their importance is set to balloon from next year as new Government rules will see all workers automatically enrolled into one, bringing up to nine million people into the system.
After his speech Mr Hyde Harrison said:
“The current system is a mess, and what’s really worrying is that over the coming years millions of people will be brought into it.
“We need a radical rethink of the way we ‘do’ pensions in the UK. If we don’t, then too many people will save into a pension only to find themselves shortchanged in their retirement.”
“We must move from today’s significantly flawed structure to a world of large, efficient, well-run and low cost pensions which are run in the interests of savers.”
Mr Hyde Harrison pointed to four key flaws:
1. DC pensions are too small scale, and too numerous. The UK has 42,000 workplace DC pensions, and the average scheme has just 20 members. This creates massive inefficiencies and leads to higher costs, weak governance and poor admin.
2. Information about costs and charges is far too opaque. If the pensions industry was more upfront about them then charges could be driven down. Yesterday the NAPF announced it was convening a Summit to try to establish a code of practice around charges.
3. Savers’ interests are overlooked because employers and pension providers are not really batting for them. This can affect investment returns and the governance of a pension.
4. The average worker has too many ‘pots’ and finds it overly bureaucratic and difficult to pool them together. This can leave unwatched pensions languishing in low performing funds, or being eroded by high charges.
Setting out his vision for the future of DC pensions, Mr Hyde Harrison called for a new breed of pensions called Super Trusts.
These are pensions run on a far larger scale. They would allow, for example, a small employer to join an existing pension structure with 1,000s of other members, rather than setting up its own small-scale scheme.
They would also have stronger governance measures, and high quality trustees to keep an eye on investment performance and charges with the saver’s interests in mind.
He said the NAPF would help to develop the right regulatory framework for Super Trusts, and look at ways of incentivising consolidation in the pensions market place.
He also called on the Government to provide greater stability in pensions, and for it to introduce a simpler, more generous pension which sets a clear foundation for retirement.