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Lord Hutton: UK workers should save 15% of income to fund their retirement


Automatic enrolment alone will not be enough to provide today's pension savers with enough to live on in retirement unless minimum contribution levels are increased, according to a pensions industry expert.

Lord Hutton, whose 2011 report on public sector pensions led to fundamental reform of the system, said that workers should be putting away at least 15% of their income to fund their retirement. This figure, which is almost double the planned minimum contribution under automatic enrolment legislation, was one of the main recommendations of a new report by Hutton, produced on behalf of consultancy Redington and featuring input from pensions experts at Pinsent Masons, the law firm behind Out-Law.com.

Pensions expert Carolyn Saunders of Pinsent Masons said that the recommendation was in line with the UK government's ambition to make individuals responsible for their own pensions.

"Good pension outcomes only happen if people save enough and that requires understanding and engagement," she said. "Redington's Age of Responsibility report is a timely reminder of the challenges that we face."

Currently, employers and employees must contribute a combined minimum of 2% of earnings to a pension used for automatic enrolment. This will increase to 8%, of which a minimum of 3% must come from the employer, by 2018. However, according to Lord Hutton's research, this figure will still be far lower than the proportion of salary paid into pensions in the 1970s and 1980s, when defined benefit (DB) schemes were more popular.

Automatic enrolment began for the largest employers in October 2012, and will ultimately result in up to 10 million people saving more towards their retirement or saving for the first time. Under the programme, more than 1.3 million employers will have to automatically enrol workers into a defined contribution (DC) pension scheme which meets certain minimum requirements, and will be legally obliged to make contributions towards the pensions of workers that do not opt out of the scheme once enrolled.

According to Hutton's report, part of the reasoning behind the introduction of automatic enrolment and other pension policy reforms that emerged from the 2005 Turner Commission report was the need to encourage more people to save for their own retirement. Automatic enrolment was chosen as the way of doing this that would best ensure the highest possible participation rates. The programme had been extremely successful to date, with millions of new DC pension savings accounts opened and lower opt-out rates than were considered likely, Hutton said.

"At the heart of the Turner Commission recommendations for the future of occupational pensions in the UK lay the explicit argument that the burden of responsibility for ensuring adequate levels of income in retirement should move from the state to the individual," he said in his foreword to the report.

"The role of the state going forward will be to provide a basic level of financial underpinning through the new single tier pension. Everything else will be down to the individual. Failure to make this transition towards greater personal responsibility for retirement planning could threaten the sustainability of public finances. So it is clear that given the demographic changes that are now underway in our society, with people living substantially longer periods in retirement, household saving and wealth holding must be a major public policy priority," he said.

The report acknowledged that the introduction of a "national retirement savings target" would not be without its difficulties, particularly due to historically high levels of household debt. According to Hutton, UK pensions policy should therefore focus both on encouraging more people to save, and improving public confidence in retirement saving in particular.

According to pensions experts Tom Barton and Raj Sharma of Pinsent Masons, scheme governance will become an increasingly important means of improving public confidence and delivering good outcomes for savers. In the governance chapter of Hutton's report, they recommended encouraging employer-led governance and considering allowing unions and employee representatives a vote in the selection of workplace schemes. Schemes should also make the annual report of the chair of the schemes' trustees or independent governance board public, in order to allow for the public comparison of schemes and facilitate informed buying decisions.

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