Where next for
auto-enrolment?
Where next for
Auto-enrolment needs to evolve over the next 10 years in order to deliver on its initial ambitions of boosting pension savings in the UK and improving the retirement outcomes of millions of workers.
Consultants advising across the workplace pensions market agreed that AE has proved to be a game-changer when it came to raising savings levels, but further change is still needed to ensure it continues to deliver its policy objectives.
Advisers’ number one call is for more money to go into plans. Most agreed the best way to achieve this was increasing the minimum contribution level, currently set at 8 per cent. However, all admitted this could prove difficult to implement politically in the current economic climate — with businesses and individuals facing higher bills, higher taxes and rising interest rates.
Broadstone head of pensions and savings Rachel Meadows says: “It’s pretty much universally agreed that AE minimum contribution levels are not enough to provide most people with a comfortable retirement.”
Punter Southall Aspire chief commercial officer Alan Morahan agrees: “Most people don’t realise the 8 per cent minimum contribution rate is likely to provide, at best, a ‘basic’ level of retirement income, based on the Pension and Lifetime Savings Association’s Retirement Living Standards. In reality AE contributions need to be double what they are now for society to avoid a cost-of-living crisis in the future.
“People might not like it but a 15 per cent pension contribution is actually a more realistic starting point to ensure a decent level of income after work.”
Most consultants agreed that contribution levels need to be at least 12 per cent to ensure better retirement outcomes for the nation’s workforce, although less will be required for lower earners for whom state pension will
replace a higher proportion of their current spending. Questions remain though: when such increases should be introduced, and who should bear the brunt of these higher payments?
”Most consultants agreed that contribution levels need to be at least 12 per cent to ensure better retirement outcomes for the nation’s workforce
Hymans Robertson partner and senior consultant Susan Waites suggests a phased approach, similar to that taken when AE was introduced. This may prove beneficial in the current inflationary environment, she says. “There is a need for a longer-term plan to get to higher minimum levels and a graduated approach would at least ensure small increases are introduced sooner.”
Meadows agrees adding that in hindsight further increases should have been included within the initial legislation. Redington’s senior vice president, DC & financial wellbeing, Russell Wright warns increasing contribution levels at the current time could potentially lead to higher opt-outs, adversely affecting retirement outcomes, particularly for those on lower incomes.
“Perhaps more attention should be paid to implementing a universal structure to encourage higher voluntary contributions — such as a ‘buy-one-get-one-free’ offer, where employers must match additional employee contributions up to a certain level.”
This he says would not affect employees who might opt out if AE minimums increased, but “would incentivise people to save more if they can afford to do so.”
But Hymans Robertson partner and head of strategic DC development Michael Ambery says there is a danger politicians will “hide behind these cost of living challenges for years”, kicking much needed reform further down the road. “A higher cost of living might be a reason to delay change, but it doesn’t alter when people need to retire or what they need to live on in retirement.” He points out that contribution levels weren’t raised during more benign conditions, and argues policymakers should get on with implementing these changes.
Some consultants argue companies should be bearing the brunt of new increases, with an overall split closer to a 50/50.
Meadows says: “Prior to AE employers that offered pension scheme access tended to contribute more generously. Evidently most employers couldn’t afford to return to the days of DB funding levels and wouldn’t want to bear the risk. But it could be argued that current AE contribution rates are unrealistically low for employers — and don’t reflect what is needed to have a workforce that can afford to retire at a sensible point in their lives.”
”Working patterns are one of the key issues causing the gender pensions gap, with women more likely to be out of the workforce looking after smaller children or older relatives, and therefore not making pension contributions
Wingate Group managing director Ben Clarke agrees, saying the burden of AE might have fallen too heavily on individuals. He says minimum contribution levels of 12 and 15 per cent should be split between employer and employee, although admits neither group, nor policymakers will have an appetite for such increases at present.
But if employees can’t afford to retire there are clearly significant ramifications for both individuals, and the companies they work for. This needs to be part of a wider public discussion ahead of any proposed rise he says.
While contribution increases may be many years away, consultants agreed there is an even more urgent need to remove the ‘earnings trigger’ and reduce the age at which employees are automatically enrolled into a pension scheme. The government has already agreed to implement these changes (made in a 2017 DWP review) although no date has yet been set.
Wright says: “There’s some logic in having a trigger for when AE kicks in, but the impact is definitely felt most by more vulnerable areas of society. This needs urgent attention.”
Waites says changes would improve the retirement outcomes of many lower paid workers, many of whom are women, and help address the gender pension gap. She adds that future AE evolutions might adopt more radical change. “Working patterns are one of the key issues causing the gender pension gap, with women more likely to be out of the workforce looking after smaller children or older relatives, and therefore not making pension contributions.” She suggests a state pension credit towards AE, similar to the state pension credit, to ‘top up’ these workplace pensions.
Ambery also calls for AE rules to move to an annual rather than triennial re-enrolment, when savers opt out. This could boost savings level, particularly with higher opt-out rates expected in the next year, due to rising living costs.
Consultants said that the AE framework also needs to change to ensure savers get better guidance and advice around their retirement options. Clarke says consultants and advisers have a key role to play in helping deliver this.
“Not enough has been done to address this issue. The key is around providing guidance, education and self-serve interactive tools that encourage people to understand what their combined pension benefits are likely to provide at their target retirement date.
“The earlier people understand what this projected income might look like, the easier it is to take actions to positively change what the future looks like. These are services that can be delivered through an employer by their workplace pension advisers.”
Meadows agrees not enough is being done at present, though she says additional nudges to Pension Wise — introduced in recent legislation — will help. “The biggest problem is that the array of choices is incredibly complex these days, and wrapping your head around all of them sufficiently only at the point of retirement is simply not going to lead to good outcomes.
“Building knowledge and confidence needs to start right from the point where saving begins. This means engaging employees throughout their working lives.
“One of the biggest problems with all of the current measures around helping people make decisions at retirement is that they are focused solely on pensions, and solely on one specific pot in most cases.
“It would be very rare for a decision made in such strange isolation to be the best one for the member. At the point of retirement our lives are a complex tapestry of personal goals and objectives, family and health situations, and various types of savings and assets that we have built up over the course of our working lifetimes.
“Helping people make good decisions at retirement needs to involve helping
them stand back and consider their pension decisions in the context of that entire picture.”
Ambery says the key to better education and engagement is a more joined-up approach to a number of existing policy initiatives, encompassing Pensions Wise, MaPS, PLSA retirement living standards and, an annual pension statement ‘season’ and ongoing work on the pensions dashboard.
“We need to better connect these pieces together to help people evaluate what they need in terms of a retirement income. There has been a lot of talk in recent years about ‘gamification’ – but this might start to happen if we start to look at these together.”
Consultants suggested the broad principles of AE should be extended to help boost workers financial resilience.
Wright says: “Retirement savings cannot be looked at in isolation from other financial needs. A more pressing need for most is having enough savings to cover an emergency, buy a house or pay for the annual family holiday.
“Nest (via its ‘Sidecar’ trials’) and others have released powerful data showing that people on low incomes do want to save, they just need the right structures in place to make it work. It’s a shame this is currently left down to individual employers to sort, rather than a nationwide scheme as part of AE.”
Meadows adds: “Building rainy day savings is a really sound idea, and it’s logical to try to build this off the back of auto-enrolment’s success. Some workplace pension providers already offer workplace Isa solutions, and this is likely to be one of the easier ways to establish shorter term savings pots.”
But she says she doesn’t agree that these savings should come at the expense of pension saving, given the scale of the challenge that already exists in saving enough for retirement,. “Ideally these would be additional deductions from pay.”
Consultants agreed that more needs to be done to encourage greater savings from the self-employed, but opinion is split as to whether the current AE framework is the best way to address this issue. Morahan says: “There are concerns about how the self-employed will fund their retirement, but I’m not convinced auto-enrolment is the solution.”
Meadows adds: “Extending AE to the self-employed would be hugely advantageous but very complex to administer. This would really need robust support from the government and DWP, as the logical points for pension contributions to be collected would be at the point of self-assessment or other interactions.”
Wright says: “It’s encouraging so many policymakers are interested in finding solutions, such as using the tax system to facilitate pension contributions from the self-employed. But the challenge of irregular earnings year-on-year and choosing a suitable pension provider still need attention.”