Using the state pension to increase contributions

In a Populous survey for the National Association of Pension Funds (NAPF) of 1,526 working age people, 33% said they would save more for their retirement if they knew the exact value of their expected state pension.

Schemes have been called to induce members to save more for their retirement, by presenting them with their projected state pension income within a wider campaign of literature, seminars and education.

Extra workplace saving would mean a greater retirement income and understanding of these forms of savings among scheme members.

A quarter of those surveyed said they would pay more into their workplace pension if they were guaranteed a “single-tier” state pension of £140 a week, a policy announced by the chancellor in the Budget.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said this could create a “virtuous circle” in retirement saving, where the state provision encourages the workplace provision.

Some schemes are already using the state pension in their communication strategy to increase employee contributions.

She said: “Some will say, and don’t forget, you are going to get x from the state; others will say if you are going to rely on the state, you are going to be pretty poorly off.”

The NAPF concluded the creation of a £140 single-tier state pension, one of two reform options put out by the government for consultation, would make it easier for people to understand they need to save extra to have a more comfortable retirement.

She said: “They can make some assessment as to how much they have to save on top, and then it does get easier for schemes to be able to say, ‘join my scheme it pays to save'.”

Among 18-24 year-olds, 34% said they would pay more into their workplace pension scheme if they were guaranteed a pension of £140 per week.

Segars added: “It is slightly counterintuitive for that younger age group to be thinking that far ahead, but we should take great encouragement from that.”

Greg Thorley, director of Face To Face Consultancy, said the state pension was an example of the type of “reinforcement” crucial to engagement.

A scheme or employer could make use of the government’s state pension profiler to give the employee a first glimpse of their state entitlement.

He said: “This system could be made available in the workplace by an employer either at a single desktop in say a pay office, or as a link to all employees where the IT infrastructure exists.

“If this is part of the preparatory work done before a series of seminars, it will give the employee a more holistic view of what to expect from their combined state and workplace provision.”

The cost of reform

The Pensions Policy Institute (PPI) has released an assessment of the government’s options for reform of the state pension.

It found increases in national insurance (NI) contributions payable by employers providing defined benefit (DB) schemes will exacerbate funding difficulties and cause sponsors to consider reforming their benefits package.

The first option for reform, which would be to accelerate the flat-rating of the state second pension, rather than creating a single-tier pension, would create “additional pressure” on employers providing DB schemes.

They would be forced to pay higher NI contributions, a total of £1bn across the public and private sector, while still meeting the cost of providing contracted-out pensions, according to the PPI.

The second, single-tier option would increase government national insurance revenue by £6bn in 2016.

Of this total, £5bn would come from public sector schemes, and £1bn from those in the private sector.

The report stated: “Employers with DB schemes would pay higher NI contributions… and would have to choose whether to reform their schemes in response to the reform.”