A major review of automatic enrolment will take place next year, marking the fifth anniversary of this pensions revolution.
Some may argue the review is taking place too soon. Its date was set before the most recent timetable for enrolling small businesses and phasing contributions, so it will take place before the full outcome of the original policy is known.
However, future policy takes years to come to fruition. If we do not discuss this now, any potential changes will take even longer to be enacted. With that in mind, here are 10 policies we think would improve auto-enrolment:
- Increase minimum contributions to 12.5 per cent by 2028.
- Adopt a flat rate of tax relief – save two get one free – and rename tax relief a “savers’ bonus”.
- Bring multiple-job-holders into scope by combining their salaries to take them over the qualifying earning threshold.
- Explore options to extend auto-enrolment to the self-employed.
- Remove the upper enrolment ceiling of the state pension age to encourage a longer working life.
- Officially encourage consolidation of small pension pots of £10,000 or less.
- Permit “without consent” transfers of contract-based workplace pensions, so long as savers are no worse off.
- Increase the eligibility threshold to £10,400 and lower the contribution threshold to £5,200 so that individuals can easily understand when they will be enrolled (once they earn more than £200 per week) and how much they will pay (contributions due on earnings over £100 per week).
- Adopt the following three rules of thumb:
- 40-year rule: Aim to begin saving at least 40 years before your target retirement date.
- 5 per cent rule: Aim to save at least 12.5 per cent of your monthly salary towards your retirement.
- 10 times rule: Aim to have saved at least 10-times your annual salary by the time you reach retirement age.
- Encourage the digitalisation of pensions through government policy and regulation, and a minimum level of digital functionality.
By debating these issues now, clear policies can be put in place to tackle what we already know will need to be addressed in the future.
Of course, any new rules need to take account of what happens once contributions increase to 8 per cent, as well as pressures faced by small business in an uncertain post-Brexit economy. With this in mind, timing measures is the real issue.
The first two recommendations are arguably the most important.
There is almost unanimous agreement within the pensions world that 8 per cent contributions are not enough. Indeed, the Pensions Commission’s calculation expected auto-enrolment contributions, together with state pension, to generate a replacement rate of only 45 per cent of pre-retirement income for an average earner. The Commission’s expectation was that people who wanted more should save more.
That said, we believe we can harness the power of inertia to ensure everyone saves enough to provide for a decent retirement.
Redistribution of incentives to those who are less well off will also ensure that lower earners can reach their retirement goals without having to spend their working lives in poverty. Again, it is already widely acknowledged by many pension providers and employers that a simple “save £2, get £1 free” incentive is the best solution here.
In making these recommendations public now, we hope to kick off this important debate so that broad agreement on the way forward can be reached next year. We would encourage everyone involved in pensions, particularly auto-enrolment, to consider potential improvements and make their views known.
John Lawson is head of financial research at Aviva