Next year marks the fifth anniversary of the introduction of automatic enrolment and the appointed date for the Government’s first stocktake. With auto-enrolment already lauded as one of the most successful policy interventions in modern history, what can we do to make it even better?
The first thing to say is that, by 2017, the job will still not be complete. There will still be more workers to enrol and, importantly, contributions to increase (a full year at the minimum of 8 per cent will take until April 2020 to achieve).
But if we are only half done, why are we carrying out a review so soon? That is a fair point. We will not, for example, know by then whether contribution phasing was successful. However, government policy usually takes years rather than months to form. If we really want to kick on after 2020, then the talking and debate needs to start soon. This next round of policy development should be done open and collaboratively, on a cross-party basis, making sure employers and employees are included.
So, what possible improvements might we consider? The first area should be scope. Over six million employees still are not captured by auto-enrolment due to their age or earnings. And that does not include the self-employed.
Should the earnings trigger be frozen such that it is gradually eaten away by inflation? Or should that process be accelerated by actually cutting the threshold?
What about young people under the age of 22? We often harp on about the value of making contributions as early as possible (the magic of compound interest and all that) but then settle for a policy that does the opposite. And how can the self-employed be included? Should their National Insurance rates increase with part paid into a pension? What happens if they opt out?
The second point to focus attention on should be adequacy. We have not even reached 8 per cent contribution rates yet but we already know it is not enough to provide a reasonable standard of living at a reasonable retirement age. Should we push contribution rates beyond 8 per cent, like the Aussies? And what about the qualifying earnings band? Should we seek to phase out the minimum threshold and start from pound zero? The minimum threshold is surely regressive, penalising lower earners the most.
The third area is engagement. Auto-enrolment is the antithesis of engagement – its driving force is inertia born from disinterest. UK citizens have been fed the false notion that the state will look after them, whether that is due to illness, joblessness or retirement. Maybe not in the lap of luxury, but you will not starve.
The truth is somewhat starker. The single state pension at £155.65 is less than two-thirds of the minimum working wage, and many of those on low wages already rely on food banks when a cash emergency arises. The increasing burden of an ageing population on our health service will not improve the nation’s scope for generosity.
People need to receive a clearer message from Government that they have some personal responsibility for their own retirement outcome. Coupled with a call to action and simple rules of thumb, we might at last drive the importance of long-term saving into the national consciousness, even if we do not make people financial experts.
Real communication needs to take place earlier than age 55, by which time it is too late to prevent a minority of people squandering their retirement savings a decade- and-a-half ahead of plan. We must aim to engage people earlier, from age 50, if not before.
The fourth target should be small pots. By 2020, the pension dashboard should be covering over 90 per cent of all pensions. We should examine how those pensions can be physically consolidated, rather than just virtually.
Having all your pensions in the one place makes a lot of sense financially but the real prize is better engagement. People are much less likely to ignore a big pension pot than a small one. Australians allegedly pay more attention to their super pot when it reaches the same level as their annual pay.
The review of auto-enrolment provides a timely opportunity to reset the compass in a slightly different direction. Most people looking at policy and underlying trends agree with the destination we need to reach. Now we need to agree the best way to get there.
John Lawson is head of financial research at Aviva