CIPD response to the DWP White Paper
Charles Cotton, CIPD Advisor, Reward and Employment Conditions
Our expertise and experience
Our response is based on the input and feedback that we have received from a panel of pay and benefit experts who represent the interests of around 2,000 reward practitioners, consultants and academics who belong to our reward special interest group and from members via our 48-branch network.
The CIPD has long promoted the importance of pensions (and changing labour market demographics and retirement). This area forms part of the Institute’s professional standards, which are designed to reflect the knowledge required by today’s HR professionals. Over the past two years, the CIPD has:
- produced with the Employer Taskforce on Pensions a guide on pension communication and is currently producing one on workplace financial education (which includes pensions and retirement);
- collected data on pensions, older workers and retirement through: our annual surveys on reward management and recruitment, retention and turnover; our quarterly Labour Market Outlook; and a specially commissioned survey carried out with the Chartered Management Institute;
- analysed the issue of retirement through a specially commissioned project undertaken on our behalf by the Tomorrow Project, Opportunity of a lifetime;
- examined this issue through our magazine, People Management;
- held reward special interest group and conference sessions on this topic; and
- encouraged our members to come together to discuss this issue through our branch network and online Community.
Our position
Before commentating on the DWP proposals in more depth we will restate what the CIPD regards are the roles that the state, employers and individuals should play in creating an effective and sustainable pensions situation in the UK.
The role of the state
The role of the state is to: establish a simple and understandable basic state pension that provides a safety net below which individuals should not fall; communicate and educate individuals as to what the state will provide for them in retirement; establish a ‘light touch’ legal framework that protects those individuals who wish to save through a company or personal pension; offer financial encouragements to individuals and organisations contributing to retirement saving schemes; establish a minimum legal framework that protects older individuals against age discrimination in the workplace; and adopt a strategic and integrated approach to the whole issue of pensions, retirement and aging.
A decent, stable and predictable basic state pension – the basic state pension should be worth enough to ensure that no individual is in poverty and be uprated in line with earnings to maintain its value. Means tested benefits have been successful in lifting pensioners out of poverty. However, they have now served their purpose and overly complicate the state pension system and may act as a distinctive to save for retirement via private or occupational arrangements. Means tested benefits should be phased out. Once the government has established a decent state pension, the principles on which it rests should not be readily alterable. This will enable individuals to know in advance how much they can reasonable expect to receive from the state. They can then decide whether to make additional provisions with sufficient confidence that they will not be penalised for doing so in the future.
Education and communication – the government needs to ensure individuals are aware of the size of the state pension that they can expect. It needs to improve the financial understanding of the population so that individuals can make informed decisions when making investment and savings decisions (including pensions and retirement), through supporting school and workplace financial education initiatives and by encouraging the providers of financial products to educate their customers. Part of this ongoing education and communication exercise requires government explaining what the state pension is worth, and when it will be payable, so people can build up additional savings if they wish. It also needs to communicate that the age at which the state pension is payable will rise due to increases in longevity.
The CIPD supports the initiatives undertaken by various government bodies to increase financial awareness, but believes that the overall impact of these approaches would be improved greatly if a more strategic and integrated approach was adopted.
Support – the government and its agencies (FSA, TPR, etc) need to ensure that there is the minimum amount of rules and regulation so individuals are protected from themselves and any rogue providers. However, the amount of regulation must not be so onerous that it inhibits the supply of retirement saving vehicles, and the understanding of them, by individuals.
Encouragement – the state needs to provide financial encouragement to individuals to contribute to their retirement savings arrangements and to those employers that do likewise. It should also look at how these savings vehicles (state, occupational, private and the new personal pension accounts it is proposing) can be made more flexible so that individuals are able to draw down on them when they need to. This flexibility would attract many people reluctant to tie up savings for a long time. We have developed this approach in our publication The opportunity of a lifetime: reshaping retirement.
Protecting older workers – as individuals work for longer, either because they want, or need to, it is the role of the state to ensure that older workers are protected against age discrimination at work. Again the legal safeguards must not be so onerous that employers are put off from employing older workers at all, but not so weak that older workers are discriminated against. The CIPD believes that one way of ensuring individuals are able to work for as long as they are able to is by removing mandatory retirement ages and calls on government to act on this by removing the default retirement age.
There is a role for government to educate and communicate to organisation the business benefits of employing older workers. The government is making progress in this area, such as through its Age Positive campaign which the CIPD is championing. However, our research shows that there is still someway to go before all employers recognise that older workers are as just as productive and adaptable as younger employees.
Joined up government – the state needs to start taking a strategic approach to the issues underlying the so called pension crisis. For instance, if people are going to be working for longer, will they have access readily to the relevant training and development that they will need to refresh their skills and make them employable going forward? Government needs to consider this issue at the same time as it examines all the others that are part of the pension challenge, namely: communication and education, legal safeguards, setting an understandable and decent basic state pension that acts as a ‘rock’ on which private provision can be built, and encouraging contribution to financial retirement plans. It needs to establish a mechanism for coordinating all its various initiatives in a holistic manner.
The role of employees and employers
Once people understand what they will get from the state, know that there are minimum legal safeguards in place to protect their investments and aware that they will receive tax breaks on their contributions, it is the role of individuals to decide whether they need/want to save additionally, and how much, so that they can have a comfortable retirement.
The role of employers is to decide whether they should contribute to the pension arrangements of their employees. And if so, how much and which type of scheme. For many larger employers and knowledge intensive companies there is an obvious business case to contribute ie to attract, retain, exit and engage their employees. Similarly, there are business reasons to educate and communicate to employees about the pension arrangements on offer and the savings options that exist. Research shows that the more effort employers put into benefit communication the more staff value, appreciate and participate in them.
However, for most smaller employers (who account for around 58% of total employment) there is not as clear a business case to contribute to the pension arrangements of their employees. In which case, the proposed personal pension accounts make sense for those individuals who do not have access to the tax advantaged low cost pension arrangements offered by larger firms.
Similarly, there are not as obvious business advantages to these employers for providing their employees with financial education and information. In which case, there is a need for government and its agencies to fill this gap, either directly themselves or by providing incentives to financial services providers, voluntary organisations, professional bodies, etc to provide high quality financial education and communication.
Our response
The CIPD’s more detailed responses to the white paper are as follows:
1. Encouraging and enabling private pension saving
While the CIPD would have preferred a voluntarist approach to encourage people to save more for their retirement we believe that the DWP proposals to introduce: a new pension saving scheme of low-cost, portable personal accounts; automatic enrolment into a private pension for all employees; a national minimum employer contribution of 3 per cent, between earnings of around £5,000 and £33,000 a year; and a minimum overall level of contribution of 8 per cent for the personal accounts of employees represent a sensible and practical compromise between the needs of employers and employees.
The advantage for our members of this approach, as opposed to the partnership pension and super trust proposals, is that the burden on employers, especially smaller ones, is kept to a minimum. Our members believe that giving individuals the opportunity and responsibility to invest in low cost investment vehicles should encourage personal independence, responsibility and dignity. However, as our South Yorkshire branch points out: “this will only occur if the government invests enough in an education and communication strategy to raise awareness and appreciation among employees and employers of what is being proposed and why, and how it will be executed”.
Communication and education
The success of the government’s approach to encouraging private pension saving will only be achieved through a programme of financial education and communication. Research, most recently undertaken by the FSA, shows a worrying lack of financial awareness among individuals. This lack of appreciation will inhibit the impact of the proposed pension reforms. If people are not persuaded of the importance of saving for their retirement then they will simply opt out. Even if they don’t, they may not appreciate how the scheme operates and that the value of their fund will fluctuate over time. The pros and cons of joining a pension plan need to be spelt out, but again individuals will only be in a position to make an informed choice if they are financially aware. The CIPD’s Derbyshire and Nottinghamshire branch believes that ‘pension education can not be emphasised too highly and that there is a lack of general awareness among young people about how pensions work that is missing.’
There are various financial education initiatives scattered about government departments and what is required is an integrated and strategic approach that brings these together. For instance, how does the DWP’s project aimed at providing employees aged 50 and over with guidance on finance, tax and pensions fit with the FSA’s initiative to provide financial education to employees at the workplace?
Similarly, people will not be engaged in saving for retirement if they are simply given information rather than communicated with. The government should have acknowledged this issue in its paper. It would appear that while it has given sufficient attention and resources to the design of the new savings accounts the government has failed to consider the education and communication issues fully. No matter how good the reforms are, they will not sell themselves. The CIPD is happy to work with government to create an education and communication strategy that brings together the various financial awareness and communication programmes to encourage and enable pension saving, including the proposed pension accounts.
One suggestion our members have made to raise awareness of these new accounts and to encourage participation by segments of the community who have never previously paid into, or thought about, pensions is to offer monthly cash prizes – similar to the way premium bonds operate. Some of the winnings would have to be invested in the personal pension while the rest could be taken as cash, or also be invested.
There should also be a role for the providers of the personal pension accounts to provide high quality financial education and communication. This could be addressed in the annual management fees, letting them charge a slightly higher amount for running the personal pension accounts if they also take on responsibility for education and communication.
There will be a temptation to over-engineer the new personal accounts so that they are able to offer lots of choices. However, we believe that the fewer features that exist, the easier it will be able to communicate them and the simpler it will be for employees to make informed decisions. Commenting on this, Nick Ioannides from the CIPD’s Black Country branch believes that: “The personal accounts should to be kept simple - it will be easier to communicate, easier to understand and will yield a higher take up rate among employees and employers”.
The government also needs to educate and communicate with employers, especially small businesses, about why it is introducing the new savings arrangements. It has to make a concerted effort to explain why the reforms are being introduced and that the government will ensure the additional burden for employers is kept to a minimum.
Automatic enrolment and personal accounts
While the white paper focuses on auto enrolment into the proposed low-cost savings scheme, there is little attention given to the issue of automatic enrolment into existing company schemes. It is important to define as early as possible the criteria that will be used to exempt existing occupational pension schemes from the new arrangements as they are least as favourable as the proposed personal accounts. Questions raised by members regarding existing automatic enrolment versus the automatic enrolment envisaged by the white paper include:
- waiting periods – under the white paper, employers will have to enrol employees as soon as they start work. However, due to employee turnover and/or to encourage staff retention, some employers have a waiting period before employees can join the main scheme. Will this practice still be allowed?
- health screening – The CIPD South Yorkshire branch note that some employers that automatically enrol do so after a medical to reduce the risk of death in service claims and ill-health retirement pensions. This issue has not been addressed in the white paper.
- follow up – under the governments proposals, employers will have to chase up non joiners every three years. If the existing automatic enrolment employers do not do this, will their schemes still be exempt from the new pension arrangements?
These are pressing concerns. Some employers may want to use the fact that they have been awarded exemption status in their employee recruitment, retention and engagement strategies. However, there may reconsider this approach if the three above concerns are not addressed.
Once the criteria for exemption has been established it will be useful to produce practical ‘how to’ guidance on auto enrolment for those employers who have been awarded exemption status but are new to automatic enrolment. The CIPD is pleased that the pensions minister, James Purnell, has invited it on to the DWP advisory group that will produce auto-enrolment guidance for employers. Our members do not believe that employers should be required to auto enrol those employees who opted out of the personal accounts or their company pension scheme three years previously. For instance, in its feedback to this consultation exercise, the Hertfordshire CIPD Branch stated: “We do not feel that auto enrolment should happen again after three years... This would be a burden on staff and employers”. An alternative approach would be a government inspired publicity scheme launched every three years to encourage employee participation in company or the personal accounts, such as the Swedish orange letter initiative.
One of the concerns among our members is that pension auto enrolment into company pension plans may lead to a fall in the communication effort used to engage members. To counter this danger, the CIPD will continue to highlight the importance of pension education and communication to employee engagement and the resulting impact on people productivity, performance and profitability.
The CIPD is pleased that the government has recognised that with auto-enrolment into company schemes that the issue of scheme compliance and governance becomes ever more important. The Institute is happy to support ensuring an effective compliance regime to protect employees against themselves and any rogue employers.
Employer contributions
The CIPD research, taken from the CIPD/KPMG quarterly Labour Market Outlook (Reference 1) published in February 2006, shows that employers are twice as likely to say that the proposed 3% employer contribution towards occupational pensions is too low as say it is too high. And that only 1% of employers would opt for the new personal savings accounts to cut costs. The vast majority (81%) of employers have no intention of changing their existing pension arrangements. We believe that fears of the personal accounts leading to a reduction in pension contributions by firms with existing plans have been exaggerated. Instead we believe that the complexity of the current employer legislative environment is more of a disincentive for firms to operate occupational retirement schemes.
It is only among organisations employing fewer than 25 employees that there are concerns about the impact that the 3% employer contribution will have on employment costs as they typically pay nothing towards their employees’ pensions.
Our members believe that what is most crucial to small employers is not so much the level of financial support but the extra administration burden that creation of personal accounts will create for them. Therefore, the government has to ensure that the new personal pension accounts are simple for employers to set up. Our Lincolnshire CIPD branch supports the suggestion that the government should also consider awarding grants, similar to those it gives to employers that set up “Give as you earn schemes”. The Lincolnshire branch believes that: “Such an approach would show the government is aware that the new arrangements will involve some set up costs and to recognise this it will make a small cash payment”.
The Institute notes that the government will consult further on personal accounts to ensure that they are simple to administer for employers and welcomes the opportunity to contribute further in this area.
2. Strengthening existing provision
Deregulatory proposals and pensions law rewrite project
The CIPD is not convinced that the DWP has the necessary resources for the proposed rolling deregulatory review. There will also be the natural temptation to focus on the easy issues early on, rather than tackle the more challenging but important ones. Instead, our members believe that it would make more sense for the DWP to seek views from employers as to what the most burdensome legislation is and to make a commitment to do what they can to tackle the top five. The CIPD would be prepared to help the DWP survey employer opinions through our member network.
When a national pension savings scheme is created, the requirement for employers with more than four employees to provide access to a stakeholder pension plan would become unnecessary and should be scrapped.
The Institute supports the intention to ensure that the body of law regarding pensions is intelligible for our members and is able to suggest practitioners who would be willing to take part in this exercise.
The institutional landscape for pensions
The CIPD supports suggestions to create a more joined up approach between the various pension bodies. Our members report employee ignorance of their existence and their role. The CIPD Derbyshire and Nottinghamshire branch has suggested that all bodies should be better linked to one another under one common website homepage, especially if it offered people the opportunity to do some interactive planning.
3. Providing a foundation for private saving
The Institute supports proposals to: ensure that the basic State Pension can act as a foundation for further provision, by linking its value to rises in average earnings; raise the State Pension age from its level in 2024 of 65 for both men and women, in line with the growth in average life expectancy; reform the State Second Pension so that it becomes a simple, flat-rate weekly top-up to the basic State Pension; reduce the number of qualifying years needed for a full basic State Pension from 44 for men and 39 for women to 30 for all those reaching State Pension age from 2010; establish a new Carer’s Credit for those undertaking care for the sick and severely disabled for 20 hours or more a week; and abolish the minimum contribution conditions in the basic State Pension and the Labour Market Attachment Test in the State Second Pension, to ensure that every year of contributions or credits count.
The CIPD supports the moves to create a simple, more generous, basic state pension as a foundation on which private provision can be built. The Institute also supports an increase the state pension age to pay for this. However, for this approach to be successful:
- the government must define ‘generous’ by establishing an appropriate anchor and ensuring the principles that establish its worth are not subsequently altered. This will give individuals confidence when saving (either through the new personal accounts, a company scheme or take out their own private personal pension) about how much they are likely to get from the state.
- the state pension is simple for individuals to understand which will encourage private provision. Means tested benefits should be phased out.
- the government should communicate to individuals the size of the state pension that they are likely to receive and when it is payable. Subsequently, it needs to check to ensure that individuals are receiving and understanding this message.
- the government should ensure a legal framework exists that allows individuals to feel relatively secure when making savings and investment decisions.
- the government should provide financial encouragement to individuals and employers who contribute to retirement savings vehicles.
4 Extending working life in an ageing society
The CIPD supports the proposals in the white paper: enabling greater flexibility to allow people to choose a phased approach to retirement; providing improved communications and information in support of longer working; and working in partnership with employers to encourage them to retain older workers, and to offer them greater flexibility around retirement.
The CIPD believes there is no need for a fixed retirement age. An ageing population combined with a shift towards a service- and knowledge-based economy makes it illogical and inefficient for employers to be able to force people out of employment purely on the basis of their birth date. Many people want to keep working beyond the age of 65. It does not make sense that employers will still be able to get rid of people on the basis of age rather than how good they are at their job. Nick Ioannides from our Black Country branch says: “Employment of individuals should be on the basis of their ability and their performance rather than their age”. Why should, say a pilot who has to undergo regular simulation of their flying competence be forced to retire at a particular age. Also, we believe that the regulations that underpin the default retirement age are complex and overly bureaucratic which will unnecessarily add to the workloads of many of our members.
The CIPD recognises that this will require a shift in attitudes and actions among employers and managers about working for longer, employing older workers and understanding what engages them. However this can be overcome by:
- the government managing expectations among individuals that people are now living for longer and to fund this they will need to work for longer, save more or do both.
- the government and its agencies, supported by such bodies as the CIPD, highlighting that older workers can deliver significant benefits to the business.
- the government and its agencies providing access to training and development opportunities so that individuals can shift careers over an extending working life, especially those in physically and mentally demanding jobs who may not wish to carry on working in these roles.
- the government spelling out the demographic facts and how these will impact on the labour market and the implication for employers and recommendations for responses.
- the CIPD encouraging and helping employers to review their people management and development polices to ensure that they are able to engage the mature contributor, such as performance management and appraisal, learning opportunities and job/work design.
If the government wishes to improve the health of older workers then one approach is to support employer initiatives around the area of wellbeing. As well as helping employers reduce employee absence it has a beneficial impact for society that individuals will be able to physically work for longer, so contributing to the UK economy. Again there is a role for a well thought out education and communication strategy to raise awareness of this issue and the CIPD would be happy to support it.
The Institute has long championed the business benefits of employing older workers. Our research with the Chartered Management Institute (Reference 2) shows that while there is still a way to go before people stop being discriminated on their age, there has been much improvement in the mindset of employers. Our recent recruitment survey reveals that many employers are making a concerted effort to recruit over 50s (Reference 3). Many of our members have adopted flexible working at their organisations which older workers are able to take advantage of and we hope that now A-day issues have started to be resolved, employers will turn to take advantage of the legislative changes which allow employees to take a pension as well as continue working for them.
Conclusion
For the proposed package of reforms to work, the government needs to take a holistic perspective to the pensions and retirement challenge. Rather than having a series of initiatives that come across as short-term, ad-hoc responses that are scattered around various departments, it needs to create a strategic approach that brings together all the relevant departments (eg DfES, DWP, DTI, HMT), to look at what needs to be done to encourage individuals to stay in work for longer and to encourage employees and employers to become aware of, and contribute to, retirement savings arrangements (including pensions).
References
1. Labour market outlook, CIPD, February 2006
View the survey
2. Tackling age discrimination in the workplace: a new age for all, CIPD and Chartered Management Institute, 2005
View the report
3. Recruitment, retention and turnover, annual survey, CIPD, 2006
View the survey