The automatic enrolment story has had a successful start but to ensure more workers get their happy ending in retirement the Department for Work and Pensions wants to keep things on the right track. To do this, it is conducting a review of the system that will consider three themes: coverage, engagement and contributions. So what policy recommendations would the industry like to emerge from this?
Currently, the earnings trigger for auto-enrolment is £10,000, the age criteria is 22 to state pension age and the self-employed are not covered at all.
Fidelity head of pension policy Richard Parkin points to Office for National Statistics data suggesting 35 and 25 per cent of employed men and women respectively are falling outside the auto-enrolment system as evidence that it needs to include more people.
He says: “In particular, we need to look at those who are falling outside the coverage because they have multiple jobs. It seems to be disproportionately affecting women who have flexible employment and are not hitting the £10,000 trigger point.”
The Tax Incentivised Savings Association would like to see the removal of the £10,000 earnings trigger altogether. Tisa policy strategy director Adrian Boulding says: “At the same time, we recommend the qualifying earnings lower limit, by which the first £5,824 of annual earnings do not count for pension, should alsobe removed.”
This would mean everyone who earns money would have a pension, with retirement income directly related to their earnings.
But there would be big risks involved with such changes. As Sanlam UK head of employee benefits Elliott Silk suggests, opt-outs would be high. He would prefer the minimum age criteria to be lowered. He says: “My belief is that people should pay into a pension as soon as they start work.”
Silk also supports Royal London director of policy Steve Webb’s idea of increasing the Class 4 National Insurance contributions paid by the self-employed out of their profits to fund retirement savings.
Webb says: “There are 4.5 million self-employed, and the DWP says an average of one in seven paid into a pension last year. We all know and say it is a problem but nobody has come up with an answer. I put a solution out there. If people wants to pick holes in it, that’s fine.”
And pick holes in it they have, with many voicing concerns such a proposal would simply prove too unpopular with the self-employed.
Capgemini Consulting principal (wealth, long-term savings and insurance) Rod Bryson says the issue is the difficulty involved with making pension contributions for those with small companies just about managing to pay their tax bills.
He says: “Is it better to trade off 7 or 8 per cent in a pension or for that tax to be paid? What’s better for the individual and for the country? It’s a tough question.”
Bryson believes the Government should find a way to incentivise the self-employed to save for retirement, even if it is just in the early years when people are struggling to build their businesses.
Smart Pension chief operating officer Peter Walker suggests those self-employed with commissioning employers be brought into auto-enrolment via their payroll, with a pot-follows-member arrangement.
However, Navin Thaker, a partner at accountancy firm HW Fisher & Company, warns against anything too drastic. He says the employers he deals with already see auto-enrolment as a burden and implementing any policy changes as a result of this review is likely to mean additional costs that will not go down well.
Most in the industry agree the key is getting people into the habit of saving more widely, no matter what vehicle they use. But there are things that can be done to boost retirement savings, in particular.
Charles Stanley pensions and investment analyst Rob Morgan says communication is most important. He says: “It is a stronger message to employees if the employer matches their contributions. Doubling the value of your pot – even without the consideration of tax relief – is compelling and likely to reduce the opt out rate.”
There also needs to be more effective communication of the fact people have a responsibility to fund their retirement. In particular, this must make it clear the state pension alone will not provide a comfortable living.
Parkin says: “Everyone in the pensions industry knows people need to save more and that the state won’t provide enough, but the Government has not been as direct as it could be.
We can learn from the US experience of timing contribution increases with pay rises. It is money people have not got used to spending
“We need to have a more grown-up conversation about retirement – not to scare people but just to get them to understand. Young people are not saving but it does tend to be that demographic who are less likely to opt out of auto-enrolment. That may be because they know nobody is going to bail them out.”
It is widely accepted that contribution rates need to rise above the 8 per cent minimum already planned for 2019. But the industry is also conscious of the fact this needs to be handled carefully. Indeed, there is strong support for the DWP’s decision to make no policy changes on contributions this year, as many feel we first need to know if the planned increases to member contributions of 3 per cent in 2018 and 5 per cent in 2019 have an impact on opt-out rates.
Zurich head of corporate funds propositions Martin Palmer says: “Increasing the minimum beyond 8 per cent too quickly could lead to masses of employees opting out, especially when real wage growth is stagnant and the outcome from Brexit is still uncertain.
“In the short term, there are other ways to boost saving levels, including rolling out a ‘Save More Tomorrow’ scheme, which would see a slice of every pay rise workers receive added to their pension contributions, unless they choose to opt out.”
Webb agrees. He says: “We can learn from the US experience of timing contribution increases with pay rises. It is money people have not got used to spending. We have to legislate that that is the default unless you opt out. We know it works.”
Society of Pension Professionals president and Spence & Partners director Hugh Nolan says: “There is a real risk that higher inflation post-Brexit and continued pay restraint might make the scheduled increases unpalatable for a number of people, potentially driving opt-out rates much higher and undermining the success of auto-enrolment to date.
“Offering an ‘opt-down’ choice to members could keep people in schemes rather than making them choose all or nothing.”
Adviser view: David Brooks, technical director at Broadstone
Any review panel worth its salt would be critical of the Government’s decision to delay the rate of increase to the minimum contributions. This is the major issue, as people are not saving enough and still will not be in 2020 when the current timetable has completed its journey up the scale to 8 per cent.
The Government should risk some opt-outs and irritating employers by timetabling an acceleration to the minimum contributions. However, it should consider whether we allow people to opt out of the increases and so having two tiers of contributions.
The minimum earnings threshold should be reduced. This is the only effective way of bringing the low paid (and women, in particular) into auto-enrolment. The Government says it has not reduced it because of the way tax relief would be applied, as schemes use the net pay arrangements (contributions deducted from source). All schemes should be able to reclaim the tax for non-taxpayers, maximising their savings.
Adviser view: Brian Smyth, head of Ascot Lloyd Benefit Solutions
Employers need to ensure employees understand why it is important to save for retirement and plan accordingly. Simple lessons like thinking about how to invest inheritance could help bridge that gap. We also need to ensure that self-employed people, in particular, are aware of the need to plan for the future.
Education on the simple concepts of how pensions work is key. The Government’s proposed Lifetime Isa will muddy the waters and a confused public does not need more choice. Savers will require significant education to fully grasp the implications of the Lifetime Isa to ensure they do not opt for it over valuable auto-enrolment-driven employer pension contributions.