The future of defined contribution (DC) pensions in the UK must see the debate move away from a focus on absolute pot sizes and again examine the issue of retirement income, former government minister John Hutton has said.
Hutton – a secretary of state for work and pensions who went on to pen a review of local government pension schemes for the current coalition government – questioned whether people knew how much workers needed to put aside for retirement and what kind of payments any pension pot would make possible.
Speaking at the launch of Redington’s ‘Age of Responsibility’ report, he said: “It doesn’t help if all we talk about is the size of the pension pot. It tells us very little about the sort of income we might generate and the lifestyle this income might support.”
Hutton spoke in favour of a national retirement savings target of 15% – significantly above the minimum rate of 8% under auto-enrolment from 2018 – and warned against the consequences of not improving savings rates.
“If we get this wrong, we might need to revisit the whole question of compulsion,” he said. “We don’t need to do this yet, today, and I hope we never need to do this.”
The former Labour MP called for innovation of investment products as a way of increasing certainty, although he did not support the potential introduction of investment guarantees.
He warned against falling into the trap of believing that, “through some magic sprinkling of fairy dust”, DC could become more like DB.
“We can’t, but I think we can significantly improve the outcome,” he said.
Raj Sharma and Tom Barton, partners at law firm Pinsent Masons, went on to recommend changes to the governance structure of DC that could see greater pressure applied to pension providers and employers to ensure good outcomes.
Their chapter in the report, one of 14 in total, questioned why employees played a limited role in selecting DC providers despite shouldering investment risk.
“Indeed, a worker who agrees to sacrifice salary for pension contributions and invests in a default arrangement effectively plays no role at all,” the lawyers said.
The chapter suggested savers should be able to exert an influence on the provider used for their auto-enrolment offering – an option currently unavailable without foregoing the employer’s contributions – as a means of ensuring their best interests were served.