The Department of Work and Pensions (DWP) is launching a five year research study into whether employees already enrolled in workplace pensions can be encouraged to save more with automatic increases to their contributions each year.
Forming part of the DWP’s Informed Choice Programme, the Pension Increase Pledge (Pip), is a pilot study which has asked four or five employers to implement the PIP into their workplace pension to see if pension contributions go up.
Legal and General (L&G) is the first company to sign up to the scheme, and from today will be asking over 2,000 employees to sign a pledge promising to start contributing to the company pension scheme from July 2006. The Pip will be aimed at both employees who are already contributing a small amount to their pension in an effort to get them to increase their savings, as well as those employees who aren’t contributing at all,
The idea behind the scheme is that employees start at a contribution rate of 1% of their salary from July, then each year this rises by 1% until it reaches 5% of their salary, which is the limit for the L&G matching contribution for its staff stakeholder scheme. These increases have been made as small as 1% so that employees feel they are affordable.
Meanwhile, July has been picked as the starting date for the contributions as that is when the pay reviews at L&G take place, the timing has been specifically chosen to make employees feel slightly better about putting money into a pension. The study suggests companies should present the Pip to employees around six months before pay reviews are due, so they have time to get used to the idea and hopefully feel the contributions are more affordable.
Once a form has been signed, the employee is still allowed to change their mind and reminder letters are sent out before the contributions start, telling the employee about their promise and how to change their mind if they want to. At any point an employee can stop the pledge and either stop contributing to their pension altogether, reduce their contributions or stay at the same level of say 2% or 3% of their salary.
Adrian Boulding, pensions strategy director at Legal and General, says these manageable steps implemented at a time of year when the pay review is due, will hopefully get many more people starting to save, or increasing their contributions.
He adds: “The advantage of Pip is that it is a sensible and more affordable way for employees to start or increase pension savings. We are very pleased to be working with the DWP on the Pip pilot and feel sure the concept will have wider appeal to many employers with staff pension schemes.”
Based on an American idea, Saving for Tomorrow, the Pip will be a five-year longitudinal study, which for the L&G staff that continue until the end of the programme will not finish until July 2011. The study will be monitored and evaluated by external independent researchers who hope to publish initial findings on what is and isn’t working about the scheme by the end of 2006.
Stephen Timms, Minister for Pensions Reform at the DWP, says that while joining methods such as auto-enrolment were successful in encouraging people to save for their future, employees do not always act to increase their contributions once they are enrolled. He adds the study will research if such inertia can be overcome by pre-agreed increases in contributions.
“This research is important in order to find out what works, and it represents another step forward in our commitment to explore and test approaches in the UK which make the most of pension provision in the workplace,” he adds.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
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