Staying on top of your pension

Stewart Mott · 15 September 2021

On Pension Awareness Day, Prospect pensions officer Stewart Mott, discusses the different types of schemes, looks at some new developments, such as the upcoming pensions dashboard, and offers some top tips for getting the most out of your pension.

Defined Contribution Pensions

Defined contribution (DC) pensions have become the dominant type of pension scheme in the private sector. Defined benefit (DB) pensions within the private sector are, with a few exceptions, in runoff following closure to new entrants many years ago, with some schemes also now closed to future accrual.

DC pensions aren’t really a pension at all. They are a savings account that we contribute to throughout our working life, that is invested in a unit linked funds, that will provide a pot of money at retirement that can be used to purchase a pension.

The only certainty element of DC pensions is the amount we contribute. The level of pension you get will depend on investment performance and life expectancy.

With this type of pension there is the onus on us as individuals to make sure we save adequately for retirement and manage any risks from investment performance or longevity.

What’s longevity risk?

Life expectancy is continuing to increase, albeit at a slower rate in recent years. This is a risk, as we don’t know how long we will be expecting to live in retirement. The longer we live in retirement, the longer the money we’ve saved at retirement needs to last.

Top tips for members:

  1. Get a value calculated on the same day of all your pensions and find out the cost of the charges of each pension.
  2. Estimate using online calculators how much you are on track to receive at retirement with your current contributions.
  3. Logon to the state pension checker and see if you are on track to get the full rate of the New State Pension
  4. Consider if you are on track to be afford the retirement you’d like to have and whether it would be beneficial and affordable for you to increase your contributions.

Three developments we hope to see to help members of DC pensions:

Pensions Dashboard

The Pensions dashboard will make engagement with pensions easier when it’s introduced and should prevent you from losing track of pensions from previous employers. This project will create a single dashboard with information on all your occupational pensions and the state pension. The dashboard is expected to launch in 2023.

Auto-enrolment reform

The Pensions Minister, Guy Opperman has committed to introducing reforms to build upon the success of auto-enrolment in the mid-2020s. We would like to see:

  • Qualifying age for auto-enrolment reduced from 22 to 18
  • Qualifying earnings to start from the first pound earned and not the lower earnings limit
  • Postponement period of up to 3 months for auto-enrolment reduced or removed
  • Increases to the minimum contributions required, with parity between the minimum required from employers and employees

NEST Sidecar Trial

National Employment Savings Trust (NEST) are trialling the introduction of a sidecar savings account. This initiative is seen as a solution to alleviate apprehension to save for retirement for those on the lowest earnings or in insecure employment. If implemented, we believe this could be useful for our freelancers and members working part time.

We will explain how the sidecar model works in our Freelancers & Pensions event at 6:30pm on Wednesday 15th September. Sign up here.

Collective defined contribution pensions – a third way?

The UK will soon have its first collective defined contribution (CDC) pension scheme at Royal Mail. This is being introduced for all staff and will be open to new staff.

This is an exciting development, as supporters of this new type of pension scheme for UK believe it can provide better benefits for members than traditional defined contribution schemes, whilst having a fixed cost for members and employers.

To be able to lobby employers to consider CDC, we need our members to demonstrate this a change our members want.

Please join our expert panel on Thursday 16th September at 12:30pm to hear about how these schemes work, and the potential advantages and disadvantages of the scheme. Sign up here.

Public sector pensions

Latest developments

Last month we submitted consultation responses to Treasury on reform of the cost control mechanism for public sector pension schemes and the review of the methodology of the discount rate. We are awaiting the response to those consultations and are then expecting there to be a review of the level of the discount rate.

2015 remedy program – McCloud

On the 1 April 2022, all civil servants will be enrolled into the Alpha pension scheme, with the final salary pension schemes closed for future service. Members with final salary benefits will continue to have their service linked to their current pay.

This change is also taking place in the Firefighter, NHS and Teachers schemes respectively, with future accrual provided in the 2015 schemes.

As we’ve previously reported to members, the Treasury has announced a deferred choice underpin will be implemented to provide members with a choice of how they wish their service to be treated between the 1 April 2015 and 31 March 2022. The administrators have been set a deadline of October 2023 to get ready to implement this choice for members. The government will be legislating for the remedy throughout 2022 and 2023. In the meantime, legislation will be passed to move all members to the reformed schemes from 1 April 2022.

On Friday 17th September at 12:30pm we will provide a recap of the 2015 remedy program to rectify age discrimination in the transitional arrangements from the reform to public sector pensions. You can sign up to listen to this update and ask questions here.