As the 2017 Auto Enrolment Review draws to a close, the industry waits with baited breath to see what recommendations might be made.
The main focus of the review has been to look at the existing coverage of the policy and consider the needs of those not currently eligible for auto enrolment.
The review won’t make explicit recommendations around the adequacy of contributions but will provide “an opportunity to strengthen the evidence around appropriate future contributions into workplace pensions”.
So, what conclusions do we hope the review will draw?
- Removal of qualifying earnings
Firstly we hope that a recommendation will be made to remove qualifying earnings from the auto enrolment calculation so that pension contributions are calculated on every pound of salary.
Auto enrolment minimum contributions exclude the first £5,876 of a savers’ salary and anything over £45,000. This means that for somebody earning £10,000, just £4,124 of their salary counts for the purposes of auto enrolment. Over a lifetime of pension saving, basing auto enrolment minimum contributions on every pound of earnings would significantly improve outcomes for all savers, but particularly women, part time workers and low paid who are disproportionately affected by the qualifying earnings rule.
- Removal of the auto enrolment trigger
We would like to see the £10,000 auto enrolment trigger removed so that everyone is auto enrolled regardless of their salary. While more than 8 million people have been auto enrolled, more than 7 million have been assessed and excluded from the policy either because they don’t earn enough or don’t meet the age criteria. Removing the trigger would mean that a larger proportion of people would have the opportunity to save for their retirement.
- Lower the auto enrolment age to 18 and increase the upper age to 70
We think there would be merit in reviewing the age at which people are auto enrolled. The Financial Lives survey recently published by the FCA reveals that 70% of 18 – 24 year olds have no private pension scheme.
At the moment, employees aren’t auto enrolled into a workplace pension until they are 22.
If the age was lowered to 18, around 1.5 million 18 -21 year olds would qualify. Lowering it to 16 would have less of an impact as just 10% (100,000) 16 and 17 year olds would earn enough to be auto enrolled.
Contributions made in the early years of saving are particularly valuable as year valuable as they get the longest period of investment growth.
Increasing the upper age from State Pension Age to 70 would send a message that it’s never too late to start saving and would automatically capture all those people who now smooth the transition between work and retirement by doing some work beyond SPA.
- Consider rebalancing auto enrolment minimum contributions
Analysis conducted by the Pensions Policy Institute (PPI), commissioned by NOW: Pensions, shows that UK employers are bearing less of the pensions burden than other countries that have nationwide automatic enrolment schemes or nationwide DC schemes.
The study, which examined pension provision in Italy, New Zealand, Japan and Denmark revealed that in the UK, employers making auto enrolment minimum contributions will be bearing just 37.5% of the contribution burden come April 2019 when contributions reach 8% of qualifying earnings. This compares to 84.8% in Italy, 66.7% in Denmark and at least 50% in Japan. The only country which is less generous, is New Zealand where some employers bear only 27% of the burden, although that rises to 50% for employees that select New Zealand’s bottom tier.
At the moment, the message to savers is relatively simple – “buy one, get one free” – but as minimum contributions increase, it’s going to be a tougher sell with employees paying in more than employers and this inequality could drive opt outs.
Research we conducted revealed nearly a quarter of auto enrolled savers “definitely will” or “might” opt out, when minimum contributions hit 8% of qualifying earnings in 2019. But, nearly three quarters 74% of those that intend to opt out say they would either “definitely” or “probably” continue to save into their workplace pension, if contributions were rebalanced and employers put in a minimum of 5% with a 3% staff contribution.
- A roadmap to increasing contributions beyond 8%
While the Auto Enrolment Review won’t explicitly address the question of adequacy, what we do hope is that it’ll lay the groundwork for future discussion. There’s widespread agreement that 8% isn’t sufficient, but little agreement on what the magic number should be. But, the longer we avoid tackling this issue, the greater the risk that we’re giving auto enrolled savers a false sense of retirement security.
There’s no doubt that auto enrolment is working getting people on the savings ladder but let’s make sure that it reaches its full potential – significantly improving retirement outcomes for millions more people.
Adrian Boulding, Director of Policy, NOW: Pensions