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Raising the bar for DC pensions

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In order to achieve a dignified retirement, most people need to be saving more into their pensions. With people now living longer, and the state pension age increasing, this has never been more of an issue than it is now!

The introduction of auto-enrolment in 2012 ensured that millions more people are putting savings towards their pension.  On the whole it has been a great success, with low opt-out rates, as pension scheme members have continued saving either by choice or inertia.  Automatic enrolment contributions are now at their highest level, with some members receiving contributions as high as 9%, which is definitely an improvement. However, whilst those who have been automatically enrolled into a pension scheme may feel like they are contributing sufficiently, is the automatic enrolment minimum really enough to have an adequate, let alone dignified, retirement?

With this in mind, The Pensions and Lifetime Savings Association (PLSA) launched The Pension Quality Mark (PQM) in 2009. This was designed to encourage and reward companies who were, amongst other things, providing higher levels of contributions than the minimum legal requirements. In April 2019 the automatic enrolment minimum contribution levels were increased, and the PLSA have now raised the bar in respect of being able to obtain a PQM.

It is important to note that the PQM does not solely focus on contributions; it includes reviewing governance, training, communications and much more, but clearly, a major part of the PQM is the level of contributions. The new standards now require an employer to automatically enrol employees at a minimum of 12% of pensionable pay, of which an employer must pay at least 6%. The PQM Plus (the more elite version) requires an employer to automatically enrol employees at 15% of pensionable pay, of which the employer must pay at least 10%. The main difference introduced by the new PQM standard is that employers must automatically enrol all employees into the pension scheme at the new PQM level.  Previously it offered qualifying PQM levels as an opt-up option, which is no longer the case.

We support the PLSA and the new PQM standards – anything to get people saving more can only be a good thing. However, the risk of mistakenly assuming that a dignified retirement will be achievable still applies – and may actually be made worse by having a PQM, if members and employers then don’t question whether 12% is enough. The reality is that many people may need to save more than 12% of their salary throughout their working career in order to meet their retirement objectives.  As a nation, we run the risk of many people being left disappointed!

Persuading someone in their early 20s to start saving 12% – let alone 15% – of their monthly salary into their pension may be a hard sell, even with a large employer contribution.  Other commitments, such as saving for a house, or bringing up a family, may well seem more pressing at that age than a retirement many decades away.  Therefore, combining pensions with more engaging saving products aimed at younger generations may really help when it comes to developing a saving culture.  It would be encouraging to see the PQM consider this when they next review their requirements.

The key point is that many of us are not saving the proportion of our salaries that we should be. As a nation, too many of us are naively sitting in the automatic enrolment minimum box, and also have inadequate savings overall. Maybe it’s time for employers and employees alike to think outside that box, and take a more proactive approach.  Then, and only then, will we truly be safeguarding ourselves when it comes to our retirement expectations.

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