The Pensions Regulator has published guidelines on how to provide good defined contribution pensions. While these are aimed at employers and pensions providers, they can help employees identify whether they are in a good workplace pension scheme.
In a defined contribution plan, fixed contributions are paid into an individual account by employers and employees. The contributions are then invested and the returns on the investment are credited to the individual's account. On retirement, the member's account is used to provide retirement income, in most cases by buying an annuity.
The principles for good workplace defined contribution pensions include:
■ giving members value for money and being transparent about the charges involved, disclosing these annually;
■ offering different options to reflect the needs of all members;
■ offering flexible contribution structures; and
■ communicating clearly to members from joining until retirement, and helping them optimise their income at retirement by communicating the options available - for example, the different types of annuities.
Not all workplace pensions adhere to these principles, though. "If pension providers implement these proposals it could increase pension payouts for many people by around 10 per cent over a life time, without members making any extra contributions," says Peter McDonald, partner at PricewaterhouseCoopers. "For example, greater transparency and governance will tend to reduce costs, and flexible contribution structures encourage greater saving over the long term. The process identified to help members optimise their income at retirement will also boost payouts."
When charges are very visible to employees this tends to result in them going down, while the guideline that suggests ongoing governance and maintenance should mean employers are less likely to use poorly performing funds that don't grow retirement savings as well. Encouraging people to use the open market option when choosing an annuity to compare different products and providers, or look at annuity alternatives, should also provide a boost.
Take action
But these are guidelines, not compulsory rules to guarantee a good scheme, so if you want the best outcome for your retirement you still need to be proactive. Mr McDonald says you could ask your employer how their scheme rates against the pensions regulator guidelines.
Getting good advice at the end of your contribution period on what form of retirement income is crucial: if your employer doesn't advise you make sure you still get advice. You can get free information from sources including The Money Advice Service and The Pensions Advisory Service or find an independent financial adviser at www.unbiased.co.uk.
"Actively plan what you want to achieve in terms of your level of retirement income, because your employer scheme may not be enough," adds Jaskarn Pawar, chartered financial planner at Investor Profile. "You may need to top this up with, for example, a personal pension and an individual savings account (Isa)."
While the guidelines are helpful, they do not place enough emphasis on two key aspects of retirement saving, according to Tom McPhail, head of pensions research at Hargreaves Lansdown. These are the amount you put in and how long you pay in for.
With the exception of a few cases, even if your employer's defined contribution scheme is not the best on offer, it tends to be worth staying in. Even if the level of your employer's contribution is not very high, for example, less than 3 per cent, Mr McPhail says you should not leave or opt out from joining the scheme as it would be difficult to replicate this level of saving elsewhere. Employer pensions are particularly effective when they are paid as salary sacrifice because this cuts your national insurance contribution and may also cut your income tax.
So be aware of the charges on your scheme and how much they eat into profits, although these are typically not in excess of 1 per cent. And if they are higher you will probably do better in your employer's scheme than in a personal pension with lower charges, because of the contribution.
The choice of funds in your employer scheme really affects your growth rate but, again, weigh the value of your employer's contribution against a personal scheme with a better choice of funds. You can always ask your employer if the company would be willing to make the contribution to a scheme with better funds.
