The pension auto-enrolment scheme started this month. It involves the biggest companies first. Employers and employees will have to contribute a minimum percentage of pay to a qualifying pension, unless the employee opts out. This means 1% each from employer and employee to start with, but contributions will rise in steps to 3% and 4%, respectively, within five years. If you take account of tax relief on the employee contribution, 8% of salary will be going in.
To achieve an acceptable retirement income from a defined contribution (money purchase) scheme, many experts think that a greater proportion of salary must be paid in. As it happens, there is already a voluntary scheme that requires a higher level, with 6% contributed by the employer towards a minimum of 10% overall. The Pension Quality Mark scheme (PQM) was started three years ago by the National Association of Pension Funds to lift confidence in defined contribution occupational pensions, as more generous final salary schemes were being closed.
The PQM emerged in the wake of Government action to assist defined contribution schemes through pension regulation changes. The 2006 regulations were made with the aim of increasing flexibility in the amounts contributed, variety of investment options, benefits provided and retirement age chosen. It nevertheless remains the case that defined contribution pensions put investment risk on the employee and make their eventual pension income rather less predictable than with a final salary scheme.
Considering the turmoil and uncertainty affecting many pensions, the big pension funds wished to boost belief in the capacity of defined contribution schemes to provide worthwhile pension income in retirement. They could not guarantee pension levels, which would be dictated mainly by long-term investment performance and future annuity rates, so the NAPF opted to set minimum contribution levels for PQM eligibility and demand high standards from those professionals engaged in setting up and operating occupational pensions.
The NAPF also wanted PQM to achieve the aim of making pensions easier to understand, to help individuals with the decisions they need to make. Some professional advisers were already taking steps in this direction, when individuals or companies sought their advice, but the NAPF wanted to go further. Thus, PQM demands clear and engaging communication with members concerning their scheme. External input is sometimes needed to aid communication on pension matters, as not all employers have the required capability in-house, so PQM encourages advisers to maintain high standards when assisting pension scheme development and employee communication on behalf of employers.
To sum up, the ‘8% of salary’ contribution under auto-enrolment is seen as an absolute minimum, with the 10% required under PQM as more realistic and something higher still as the goal.
If you need guidance on any of these issues, contact us.
Professional advice is essential
When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.
NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.