Steve Webb: The fool’s paradise of automatic enrolment

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We have all seen the endless reports warning we are going to have to work until we drop. I suspect most members of the public that read such stories are tempted to put their head back under the duvet.

Certainly, there is little evidence rules of thumb, such as telling people they need to save “half their age” as a percentage of their income in order to achieve a decent retirement, have any impact on getting people up to the right level.

An interesting question is whether automatic enrolment combined with the new state pension will change all that. Soon, the vast majority of workers will, for the first time, have a pension of their own, while the amount they get from the state will be far more predictable than in the past.

Given the Government sets the mandatory rate of contributions into a workplace pension as well as the rate of the new state pension, citizens could be forgiven for thinking such figures will have been chosen to give them the sort of pension they will need for a decent retirement but they would be sadly mistaken.

A recent report we published, entitled The Death of Retirement, asks what sort of retirement people will get if they simply do what the Government says: contribute 8 per cent of qualifying earnings into an auto-enrolment scheme and draw a full state pension. The results make shocking reading.

To get the sort of “gold standard” pension of previous generations, with combined state and private pension of two-thirds of pre-retirement income, an average earner would have to contribute at the 8 per cent level every year from age 22 to age 77. Even a more modest “silver standard” of half of pre-retirement income would not be reached until age 71.

Of course, many people do not start saving in their twenties. But those that leave it to their mid-thirties and only contribute at the statutory minimum level will not be able to stop work until their late seventies if they want a gold standard pension. If they wait until 45, they can expect to celebrate their 80th birthday at their workplace before being able to afford to retire.

What makes the situation worse is most people do not contribute every year of their working life. For women in particular, who are more likely to have years out of paid work and may return to a part-time rather than a full-time role, the prospects look bleak in retirement if they only contribute at the basic level.

None of this is to say there is anything wrong with auto-enrolment as such. It is a huge achievement that in 2017 we are likely to see around 10 million people starting to build up a workplace pension that had no such savings just five years earlier. However, the amounts going in are woefully inadequate.

There is a good case for breaking people in gently and so I have no problem with the phasing of contributions from 2 per cent currently to 5 per cent in 2018 and 8 per cent thereafter. But we simply cannot stop there. Employers, advisers and providers should all be coming up with ways to get people to contribute more and the Government should already be thinking about how we can build on the lessons of auto-enrolment to get people beyond 8 per cent without mass opt outs.

By far the best solution remains default auto-escalation: the presumption that, unless you opt out, each pay rise will trigger a rise in your contribution rate.

There is no denying auto-enrolment has been a success but without further action there is a danger millions of people will reach later life unable to retire on the sort of income they need for a good quality of life. And they will ask us how we let it happen.

Steve Webb is director of policy at Royal London

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Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. It does make you wonder what ministers did when in power if all their bright ideas come afterwards.

    Surely during his time as Pensions Minister he could have found 5 minutes to propose this. It’s not like other pension experts haven’t been raising this issue since day.

    Had he picked a random date in the far future, say 2023 for an increase from 8% to 10%, 2028 from 10% to 12%, and so on, I’d imagine it would have passed without little real objection.

  2. It`s pretty dispiriting to aim for a “Gold Standard” pension when there is the threat of some clown ready to play around with your Lifetime Allowance and tax you at 55%.

  3. Dear Steve,

    A far more pressing issue threatening the well-being of people getting auto-enrolled is the laughably low standards you and your colleagues allowed to be set for Master Trust pensions where a lot of people’s hard earned money is going to end up “invested”, only to vanish when the majority of these schemes fold through either being too small to survive, being run by incompetent amateurs or worse still, operated by fraudsters. Hell, one is even owned by the same people who run “Wide Boys Are Us Ltd” (as reported in the BBC last week)!

    Given your personal role in the work that led directly to this fiasco, shouldn’t you – and Royal London – be more focused on calling for the White List of decent providers (Master Trust and otherwise) to be established ASAP, and working with your successor Ros Altman and her team to get Master Trust standards raised substantially as quickly as possible?

    Without this train crash being averted as a matter of the utmost urgency, the whole credibility of auto-enrollment – at whatever investment level – will be shot, and we will end up with millions of pounds of unsuspecting workers’ pension savings – made as a direct result of Government policy – being flushed down the toilet. “The biggest pension mis-selling scandal of all time, brought to you by successive UK Governments”. It isn’t going to make pretty reading. And you will be named.

    Apologies if this sounds aggressive, but if this Achilles Heal is left unaddressed, it will destroy any remaining faith the public has in saving for their retirement.

    MC

  4. If as Webb assumes every earner is saving 8% into a pension, then there is no need for a final-salary style gold plated pension with its 50% spouse’s pension (at least) as your spouse will have a pretty decent pension fund of his or her own.

    If you’ve saved 8% per annum and have a pretty decent-sized fund at the end of it, it is also very unlikely that you will want to spend all of that on an RPI-linked annuity paying about 2% per annum. I’m not saying everyone will go into drawdown and take on all the risk themselves, but there will be a spectrum of risk and the number that insist on the extreme end of an RPI-linked annuity will be vanishingly small.

    Start with a silly assumption and you get a silly answer. Very few people will want to buy a pension that exactly matches what a final salary scheme would offer. We know that that final salary schemes are unaffordable, that’s why they’re closing down even with the benefit of pooled risk and economies of scale. So the idea that all private investors will be buying the same kind of guaranteed income that a final salary scheme should offer is ludicrous from beginning to end.

  5. And here is the problem, once in power any suggestion of 8% funding would see your party out of office at the next election. The problem as always is that the general public are not sufficiently educated to understand the real gravity of their situation. How many of us see our blood starting to boil when we see public sector workers shouting about fair pensions and how hard done by they are.

    It has been known since the early 1980’s there was a pension crisis, yet each Government defers the responsibility as it will see voters turn against them.

    At what point does the Government come clean and tell everyone the truth?

  6. Royal London Director of ‘Sales’??

  7. Christine Brightwell 29th February 2016 at 2:25 pm

    I have tried to call Royal London to speak with their press office, who were going to call me back. Hm.

    Steve Webb, do you not understand the origin of the expression “rule of thumb”? Do you not understand that it is wholly inappropriate to use such an expression. The “rule of thumb” was the rule which said, in law, that a man may beat his children and his wife with a stick no thicker than is thumb. Perhaps you might like to rephrase your article.

  8. Excellent point made by Martin Campbell above. It beggars belief that dodgy master trusts are being created all over the place by scammers, and that this is apparently legal, until they collapse and run off with the money. Why is there not a basic licensing system that roots this rubbish out? Offer AE without a licence equals criminal offence, Directors of unlicensed outfits go to prison? You just couldn’t make this stuff up.

    Most young people I speak to don’t seem to expect to retire as such. Many of them are wide awake and engaged with the huge changes their world will see over the next few decades. Dealing with monstrous house prices and redundancy through technology driven structural changes are more of an immediate problem than pensions.

    • As a ‘Young Person’ (in my 20’s) I agree with your point. I don’t expect to ‘retire’ in the traditional sense, but expect to gradually work less as I get older (into my 70’s). I actually have a different concern – I currently contribute a large percentage of my salary into my pension (not easy for someone saving to buy a house, planning a wedding, considering starting a family, etc.) but I do this because I worry that by the time I retire there will no longer BE a state pension for my generation to rely on.

      Steve Webb comments: ‘the amount they get from the state will be far more predictable than in the past.’ I don’t know how this is predictable or sustainable when there is a triple lock which keeps the pension rate high, and a ever reducing workforce. Further to this, as Wild Eyed points out, what happens to that already reduced workforce when they (we) are made redundant through those technology driven structural changes… who will pay for the state pension?

      This is what prompts me to save now and take advantage of my employers generous (lucky for me) contributions as well as my own 11%.

  9. Christine: “Rule of Thumb” was used 100 years (as a builders approximation) before the alleged reference to English law and beating of wifes and children which incidentally never was.
    It is perfectly appropriate to use such an expression.

  10. But then you assume that markets will continually rise.(Or at least not fall). In this modern world it is the poor old punter that now takes the risks. In the past DB combined with a decent state pension (with plenty of SERPS) ensured that the State and the employer took the risks.

    As an ex-minister Mr Webb (like those before and after him) are in denial. If he and his cohort were genuinely concerned that people retired on a decent pension they would have raised taxes to pay for a greatly improved state pension and not foist responsibility onto the private sector.
    The amount that they get from the state will be far more predictable than in the past. But that wont alter the fact that the UK pays the lowest state pension in the OECD.

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