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Act now for change later

Auto-enrolment – devised under Labour, legislated for by a coalition and implemented by the Conservatives – has been a rare pensions policy success. It was one of four bold ideas set out by the Pensions Commission in its report in December 2005, auto-enrolment into workplace pensions, compulsory employer contributions of 3 per cent, restoring the earnings link for the State Pension and gradually increasing the State Pension age, with an increase to 66 during the 2020s.

As pensions minister at the time I welcomed these as a coherent set of recommendations addressing the concerns people had been raising. I argued that putting off our response to the challenge the Commission had laid out would lead to a crisis in 20 years’ time. The Labour Government went on and legislated for auto-enrolment, set up the National Employment Savings Trust (Nest) and reformed the state pension, including restoring the earnings link.

Almost 20 years on, the Work and Pensions Select Committee has been looking at how the new system is working out. We have not yet agreed our report, but some clear themes have emerged from the evidence we have heard.

There is still a broad consensus in support of auto-enrolment and the linked reforms. There is, however, also widespread concern that people are not saving enough, but do not realise it. There are also people who fall through auto-enrolment gaps – in particular, self-employed people, and many gig economy and part-time workers.

There is still a broad consensus in support of auto-enrolment and the linked reforms. There is, however, also widespread concern that people are not saving enough

There is also widespread agreement on some of what should happen next: in particular, that we need a plan to implement the 2017 auto-enrolment review. That recommended that contributions should be paid from the first pound of earnings and that the minimum age for auto-enrolment should be reduced to 18. The Pensions Minister told us he is still on track for delivering that “by the mid-2020s” and that a three clause Bill is ready to be put before Parliament, followed by consultation on the details.

There have also been repeated calls for contributions to increase. Many have called for this to start with levelling up employer contributions to 5 per cent. This is a difficult conversation to start in a cost-of-living crisis. However, the lesson of auto-enrolment is that you can make changes if you give people notice and phase in increases. If you wait for a good time to start, it may never come.

This is not to underestimate the scale of the challenge. Many don’t realise they need to save more. A new consensus will need to be built on the scale of the problem, and how to address it. Some have argued for a new Pensions Commission to be set up for this purpose. One way or another, we will need clarity on what we are aiming for, and why.

More work is also needed on long-standing challenges: falling self-employed pension saving, pension rights for gig economy workers and the gender pay gap. We hope the Committee’s forthcoming report on Saving for Later Life will inform the debate.

In addition, much still needs to be done to strengthen protections for people drawing their pension savings. The ‘pension freedoms’ introduced in 2015 gave people more choice, but also introduced much more complexity. They put people at risk of making poor decisions or in some cases falling victim to scams. During our Accessing Pension Savings inquiry – on which the Committee reported earlier this year – the Financial Conduct Authority told us that consumers often described pensions as a ‘minefield’. Even those who felt financially confident in other aspects of their lives struggled to understand how pensions worked. The Committee was concerned that, although Pension Wise had been set up to provide a ‘guidance guarantee’, presented as a key pillar of the reforms, too few people use it. We did not think Government and FCA plans for a ‘stronger nudge’ would be enough and recommended instead a trial of automatic appointments at retirement and at age 50. Despite our repeated calls, ministers have still not set out their plans to monitor the impact of the stronger nudge, say what they think will count as success, or set a timeline for review.

The new Government needs to address this urgently. To persuade people to
save more, we need to do more to ensure they can get the most from their savings in retirement.

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