Graduates' debt dilemma
Next year sees two significant changes to graduate entrants into the workforce. From next autumn, tuition fees will be increased to £9,000 a year for the majority of UK undergraduate degrees and auto-enrolment will start to be phased in to all UK employers.
Graduates will be in the position of having to decide whether they would be better off paying off debt or remaining in their occupationalpension scheme.
Current estimates suggest that the average debt for a student starting university in 2012 will be £53,000 graduation.
MGM Advantage technical manager Andrew Tully says: “The clash between student debt and auto-enrolment is a difficult one. I am a fan of auto-enrolment but paying off debt is always a good thing. I would like to see graduates auto-enrolling and paying off their debts but on a monetary basis, that is not always going to be possible.”
Richard Jacobs Pensions mana-ging director Richard Jacobs says: “It is a shame this issue did not get raised earlier when we were debating auto-enrolment. We always say, ’Clear your debt’ but the issue with pensions is no one is doing it soon enough. In an ideal world, I would say do both but the reality is that students may just say, ’I cannot afford this’ and then opt out and lose the emp-loyer contribution.”
However, Retirement Adviser director Nick Flynn thinks the amount that graduates will have to pay in to auto-enrolment will be so small that it will not dent their income.
He says: “In reality, the sum is modest so it maybe does not make too much difference. The earlier they contribute the better it does instil a saving discipline but I do understand that if you are struggling to pay the rent, then the last thing you need is another couple of per cent.”
One solution that has been suggestion is giving graduates the option of being auto-enrolled into a debt repayment plan as well as a pension.
Saga director general Dr Ros Altmann has said that if graduates decide to repay debt over auto-enrolment, they unfairly lose their employer contribution, so they should be able to use this contribution to service loans. Flynn suggests this option may be too complicated while Tully points out that employers may also be a pot-ential obstacle.
Tully says: “If you are an employer of a size such as BP, you will be comfortable doing this because you will get payback in employee loyalty, which is part of the concept of a pension. But will smaller employers feel the same way about paying off employee debt? I am not sure.”
He does believe that some kind of flexible system is the answer and suggests this could help engender the saving discipline commended by Flynn.
Tully says: “If we can have an auto-enrolled fund starting repaying debt, then going into an Isa and finally being diverted to a pension in some kind of package, then people will get used to X amount of money going out per month and they will hopefully continue to have X going out per month.”
But Flynn is less certain. He says: “It could encourage further cont-ributions but not long ago we were talking about students struggling to get their loans organised, so asking them to start thinking about linking that to a national pension scheme is a big leap.”
Flynn is also unsure that a flex-ible solution such as Tully’s will be welcomed by the industry. “We are struggling to get through auto-enrolment as it is, so I am not sure these concepts will come to fruition any time soon.”
The Government, however, shouldbe more accepting, says Jacobs.
Regardless of the opposition from business or the Government, he suggests this idea is worth looking at.
He says: “This is a really big issue. The Government is going to scream like hell but surely it is better for graduates to reduce their debt with an employer contribution rather than not auto-enrol at all.”
A major obstacle in the way of any such proposal would be the issue of tax relief on employee contributions.
Although Tully does not think the Government is likely to alter tax relief on student loan repayments, he does think there is room for mano-uevre. “Tax does throw a spanner in the works but it should not be insurmountable. Even if people do not get relief on their individual payments, they are still getting the employer contribution, which will make it a good deal anyway. Even if it is not immediately into a pension, I think we would all much rather graduates’ money went somewhere.”