Appointing a pensions minister with as much experience of the sector as Ros Altmann means the government has chosen someone who can hit the ground running. This has to be good news given the number of pressing issues to be addressed if the UK’s retirement savings revolution is to be kept on track.
Top of the new minister’s to do list should be an overhaul of the way auto enrolment contributions are calculated, so that workers can have a clear understanding of the most basic of facts – how much they are actually saving.
The current system of ‘qualifying earnings’, where auto enrolment contributions are worked out as a proportion of earnings between £5,824 and £42,385 fails in this regard, lulling workers into thinking they are saving more than they actually are.
It is widely reported that once auto enrolment is fully implemented, combined employer and employee contributions will be 8 per cent of qualifying earnings – but the reality is nobody will save 8 per cent of all their earnings. For someone on £10,000 a year, 8 per cent of qualifying earnings is just 3.4 per cent of total earnings, and just 5.7 per cent for someone on £20,000 a year.
The new minister should also take swift measures to stop millions of low paid workers from being excluded from auto enrolment. Current rules require workers to earn at least £10,000 a year from a single employer before they qualify for auto enrolment. This means millions of low paid workers, a majority of them women and many with multiple jobs that take their total earnings above £10,000, do not get to benefit from a workplace pension.
We also urgently need progress on dealing with the literally millions of small pension pots that will be left behind when workers switch jobs. We believe that if small pots are going to follow workers when they move jobs, they should only do so where the new employer’s scheme is a quality one. The new minister should ensure transfers on change of job should only be allowed to schemes that have been independently verified as meeting strict standards, such as the Pensions Regulator’s master trust assurance framework or the National Association of Pension Funds’ Pensions Quality Mark.
The government should also reconsider its proposal to define a small pot as being under £10,000. We think £25,000 would be a more suitable threshold, as employee engagement with pension pots is lower where funds are below this level.
It is also widely accepted that 8 per cent of all earnings, let alone qualifying earnings, is not going to be enough for most people’s retirement – the Department for Work and Pensions paper admitted as much back in 2012. The government should adopt the approach recommended by both US behavioral psychologists and the independent Pensions Institute at Cass Business School. They argue that the best way to boost contributions to a healthier 12 to 15 per cent of earnings is through a process known as ‘auto-escalation’.
Under auto-escalation an employee’s pension contribution increases automatically when they receive a pay rise, meaning they do not miss what they haven’t had.
These are concrete steps towards building a savings culture that the new adminstration should get on top of straight away. But there are other creative ideas that should be considered that can reinvent the way the nation thinks about long-term savings. One example worthy of further investigation is extending some of the flexibility now given to the over-55s to younger generations, for example to help fund a deposit on a first home, or to assist those suffering significant financial hardship.
Our research shows 54 per cent of 18 to 35 year olds would save more if they could access some of the money for a home deposit. Such an approach is already in operation in New Zealand. The incoming minister should give the idea serious further thought.
But most importantly of all, the new administration should stick to its timetable for auto enrolment roll-out. Slippage under the coalition government means workers are already having to wait until 2018 before the full 8 per cent of qualifying earnings is being paid. The nation’s workers should not be forced to wait any longer for retirement saving policy to get firmly on track.