Getting the balance right in auto enrolment
Recently, the DWP announced that more than nine million people were saving into a workplace pension and that almost one million employers have met their auto enrolment responsibilities since 2012. It is certainly good news that more people are becoming engaged in their pension planning and retirement saving. Full marks so far.
However, and there is always a however, those of us in the industry are aware that while the saving for retirement message does seem to be getting through, the how much you need for a comfortable retirement message is not. Most people fail to appreciate that, at current contribution levels, auto enrolment is only likely to offer a minimum pension. In fact, we know that the majority of people need to be saving a lot more, at least 14% according to some commentators.
The government knows this too which is why next year employee contributions are set to rise from 1% to 3% and then again in 2019 to 5%, and the employer contributions, although rising, at 2% and 3% will not match those of the employee. This in itself could prove to be a contentious issue, but there is no doubt that over time the contributions expected from both parties will steadily increase. We think the government should be upfront about this as it will allow businesses in particular to plan ahead for the long term.
Furthermore, this week a DWP review confirmed that it will be lowering the auto enrolment age criteria from 22 to 18, although the date for this has not been confirmed. In addition, there are plans to change the auto enrolment framework so that pension contributions are calculated from the first pound earned rather than the current National Insurance lower earnings limit of £5,876.
The government says their plans would bring an additional 900,000 employees into workplace pensions and would add a further £2.6 billion into pension savings and argue that removing the lower earnings limit will act as a pensions savings incentive for those with multiple jobs.
We understand the government’s desire to get more people saving and, saving sooner, and clearly the earlier an individual starts to save for retirement the better it will be – but Frank Field, Chair of the Work and Pensions select committee said the review lacked boldness.
Many believe that not implementing the changes for many more years could leave behind a whole generation of workers.
Perhaps the changes do lack boldness but there is also an argument that too much too soon could actually backfire and the number of people who see auto enrolment as being ‘too expensive’ for them could just opt out of the scheme completely, the figure currently is around 10% – but what would happen to the scheme if that were to double or even treble?
The changes now being introduced should, ideally, have been set from the start of the auto enrolment project. Simplifying the complex world of pensions and helping people understand the realities of what can be a long retirement, is a crucial job for all of us in the industry. The Pensions Dashboard could eventually help, but there is no doubt that jargon free, honest and informed employee engagement will be key.