Auto-enrolment has been a success so far. Ten million people are now saving into a workplace pension, most of whom would otherwise not be.
The proportion of eligible private sector workers participating in a workplace pension has risen from 42 per cent in 2012 to 81 per cent today. With the long-term value of the state pension set to fall, and defined benefit in terminal decline, additional workplace savings have never been more important.
The step-by-step approach has worked well. Minimum contribution rates have gradually increased since 2012. Last year’s rise from 2 to 5 per cent did not put savers off.
In April, the last of the scheduled rises – from 5 to 8 per cent – takes place. It’s possible savers will take more notice of this increase, even if the simultaneous rise in income tax personal allowances reduces the impact on pay packets.
If opt-out rates continue to be very low, however, attention will turn to a maturing auto-enrolment system based on higher contributions and compound interest. Stage two auto-enrolment, if you like.
While stage one demanded a heavy focus on the enormous administration challenge involved in bringing more than a million employers into workplace pensions, stage two will involve a greater focus on the following:
- The implementation timetable for the government’s 2017 auto-enrolment review, which recommended making contributions effective from the first pound of earnings, bringing in all eligible workers 18 years-old and above and making more part-time multiple job holders eligible by reducing the earnings trigger from £10,000 to the primary National Insurance threshold currently set around £8,400. This would bring in nearly half a million workers – two thirds of them women.
- The emergence of pension funds managing billions of pounds on behalf of auto-enrolment members will increase interest in investment efficiency. Investment costs both absolutely and in terms of disclosure will receive more scrutiny, as will the performance of default funds versus self-select options.
- How to reduce the inefficiencies the proliferation of small pots encourages. If the pensions dashboard can be the means to the digitalising of all pots, it could reduce the heavy costs of paper-based admin looming.
- Reducing the proliferation of small pots. There are 10 million auto-enrolment members now holding more than 15 million pots, with multiple pots rising fast. Finding a solution while maintaining the employer as the buyer of the pension will become more important. Auto-consolidation could be used to drive up standards via tough criteria for qualifying schemes. The Australian DC super-stream model is worth examining.
- Taking members not just to retirement but through it, with a mix of investment drawdown and longevity insurance. Trust-based providers will enter the decumulation market with FCA-regulated contract-based providers.
- The holy grail of active member engagement will continue to attract the attention of policymakers and the industry. A dashboard could help but increasing awareness is a more realistic first step; the second step being to build “as simple as necessary but no simpler” retirement products under the supervision of trustee boards.
Gregg McClymont is director of policy and external affairs at B&CE