In a statement announcing the review, the Secretary of State for Work and Pensions Damian Green said: “This government is committed to building a country which works for everyone, not just the privileged few, and now is the right time to consider who else – beyond the 10 million already set to benefit – could gain from automatic enrolment.”
The fact that the government intend to look at bringing a greater proportion of the workforce into auto enrolment is great news.
While 6.9 million have been enrolled, 6 million have been assessed and excluded either due to their earnings, age or employment status. Simply removing the £10,000 auto enrolment trigger would bring 3.3 million more people into pension saving and the majority of these workers are women according to analysis conducted by the Pensions Policy Institute. It’s also very pleasing to see the government attempting to tackle the thorny issue of how to bring the self-employed into pension saving.
Qualifying earnings bands
The review will also examine the qualifying earnings bands which is something we’ve long campaigned for.
These bands have a deeply corrosive effect of savers’ pots and getting rid of them could improve outcomes for savers by thousands of pounds as we outlined in a recent blog.
The reality is that even when auto enrolment is fully rolled out, nobody will actually receive an 8% contribution. Low earners will receive just 3.9% while those at the top of the earnings band will receive 6.9% as this infographic explains. This is misleading and has the potential to undermine the policy over the long term. It’s also very difficult for employers to administer.
Adequacy of contributions
But, the huge elephant in the room is adequacy of contributions and it’s disappointing that the review is ignoring this crucial question.
Eight years on from the Pensions Bill which brought auto enrolment into being, savers are still only contributing 2% of qualifying earnings. It’ll be 11 years from the 2008 Pensions Bill when savers begin contributing 8% of qualifying earnings.
One of the important lessons we are learning from auto enrolment is that when government set a minimum level of contribution, that’s what nearly everyone ends up paying. There seems to be an implicit assumption amongst both employers and employees that if government took the trouble to mandate a minimum contribution in legislation, then it must be adequate.
Government should be using this review to set a roadmap for increasing contributions to a point where people will be able to enjoy a decent standard of living in retirement as they did in their working years. The longer we ignore this issue, the larger the problem will be and we need to give both employers and employees time to plan in order to make these additional contributions affordable.