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John Greenwood: Will savers be convinced auto-enrolment is worth it?

The Government will have to do more on promoting cash lump sums if it wants to minimise auto-enrolment opt-outs.

Anyone who thinks that apathy is going to ensure low opt-outs for auto-enrolment is deluding themselves. When money starts coming out of their pay packets, and employees start receiving projections from providers, people are going to want to see good reasons why they should stay put.

For many of those older, lower paid employees, whose employers are paying in at the minimum 1 per cent matched contribution, the only reason they should stay put is trivial commutation – the ability to take their fund as a cash lump sum if it is less than £18,000 when they retire.

So the cash lump sum message – that actually, if you can hang on until age 60, auto-enrolment’s matched contributions makes it the best medium to long-term savings vehicle out there – needs to be a key part of the Department for Work and Pensions’ overall communication piece.

Yes, the DWP would find itself in the curious position of promoting taking cash rather than an income, which is after all the idea of the whole policy, but it is going to have to be straight with people about the reasons for staying put if they want the public to get behind it.

Even without the flat-rate pension, which is by no means a certainty, there is a risk that many people will be little better off as a result of the change.

The DWP’s research published in February 2009 found that 95 per cent of people will be no worse off on account of auto-enrolment. But that figure involves some hefty assumptions around annuities and investment returns.

Yes that research was carried out before the flat-rate pension policy was floated. But it was also published a month before the Bank of England started its policy of quantitative easing, which has punished annuity purchasers since then. Back in February 2009, a £100,000 fund would have bought a 65-year-old male a level annuity income of over £7,000. Today he would barely get £5,600. If the flat-rate pension does not go ahead, and questioning voices are beginning to emerge, then surely the DWP would get a different figure if it did its research again today.

This is not a negative reading of the situation, just a realistic one. The cost of buying pensions is the problem with pensions, as millions are about to find out for the first time.

When people get their pension projections through – and it is curious that auto-enrollers will not necessarily get the sort of personalised pension projections that people signing up for personal pensions typically get and will instead get broad-brush tables showing what different levels of contributions might give – they are going to reflect on the value of staying put.

Hundreds of thousands, possibly millions of over 40s automatically enrolled into pensions will, when they get their projections, realise they are only going to get a weekly income of less than the price of a curry.

They will have one of two reactions; that pensions and auto-enrolment are rubbish and they don’t want anything to do with them, or that they face a serious problem and need to start saving. Unfortunately, the former reaction seems the more likely. If opt-out rates are high, then the Beecroft report’s recommendation that contributions be kept at 1 per cent until after the next general election will certainly not have helped.

The nation is at the beginning of a very painful learning curve about just how much it costs to provide a meaningful income through retirement. It is an unpleasant conversation, but a conversation that desperately needs to happen. Getting the message over about cash lump sums can help take some of the nasty taste away.

John Greenwood is editor of Corporate Adviser

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. I fail to see how the target audience will benefit until means tested retirement benefits are removed.

    Why rob Peter to pay Paul?

  2. I think Steve Bee once suggested that the triviality fund needs raising to say £50,000.

    The Government should accept that you can’t buy a reasonable annuity with less.

    If it was raised to this figure then selling NEST as a cash scheme would be very attractive.

    Members would also have some protection against future rigging of gilt yields by governments via QE as they are doing now.

  3. They will have to make opting out as difficult as cancelling a subscription to Reader’s Digest.

  4. Well said Mr Greenwood, but will anyone listen? Without writing an Essay the answer to your question is a simple one – no.
    Trivial commutation limit up to £50k is a great idea, but unfortunately fraught with difficulty. How many who might build up a bigger sum will hold back as a result?
    I think the idea is on the right lines – if you want people to engage there has to be a carrot and that carrot is going to be tax. Allow the current tax reliefs and on any pension income generated up to (say) £15,000 – let that be tax free too and anything over that taxed at 20% until pension income reaches £30,000. Oh, and how about reversing crash Gordon’s grab – or will we just be fixated on costs that don’t involve an avaricious and disingenuous Government?

  5. The key problem remains the annuity trap and the government’s unwillingness to consider alternatives.

    Pretty soon, the rate for a level annuity with a 50% widow’s pension for a male aged 65 will (if it hasn’t already) dip below 5% p.a. That’s the sort of percentage you could with reasonable safety draw (tax free) from an ISA with minimal risk of capital erosion and reasonable prospects for capital growth over the medium to long term which would translate into a gently rising income stream and you’ve still got your capital.

    Why would anyone in their right mind want to participate in a scheme that will lock away your savings for decades and rob you of your capital at retirement to buy a fixed and tax-assessable income? Stuff the employer’s 3% contribution ~ it just isn’t worth it.

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