With the most unpredictable general election for 50 years barely two months away, the chances are we could very soon have a new pensions minister, with new ideas and a new approach to retirement saving. The outgoing administration should be applauded for its good work on auto enrolment, transparency and governance, but there are a number of pressing issues that should figure on the new minister’s to do list.
Top of the list has to be a determination to increase contributions beyond 8% of band earnings to a level that will give workers a realistic chance of a comfortable retirement.
Firstly, we believe 8% should mean just that – 8% of all earnings, and not just earnings above £5,772. The ‘qualifying earnings’ approach is not only potentially misleading – many people doubtless assume they are contributing 8% of their entire salary – but also hits low earners, women in particular, disproportionately. For someone on £10,000 a year, 8% of band earnings actually means 3.4% of salary. So when they come to retire they will have saved less than half what they may have expected. An urgent priority for the new pensions minister should be the removal of the qualifying earnings approach, with contributions instead based on all earnings.
The current system is also excluding too many people from auto enrolment altogether. While 5.1m workers had been auto enrolled into pensions by the end of January, an almost identical number have been excluded from pension saving, mostly on the grounds that they do not earn enough to qualify.
By restricting auto enrolment to those earning at least £10,000, the rules exclude millions of low paid workers, particularly women, who earn less than that, even if they have several jobs that together add up to more than £10,000. To address this unfairness, the trigger for being included in auto enrolment should be linked to the threshold for National Insurance contributions lower earning limit, currently £5,772.
Once these priorities have been addressed, we would urge the incoming pensions minister to think about going beyond 8%, which any financial adviser will tell you is not enough to achieve a comfortable retirement. The independent Pensions Institute, part of Cass Business School, argues the best way to increase contributions to the 12% to 15% level generally accepted as sufficient is through a technique known as auto escalation. Auto escalation sees employees nudged into diverting annual pay increases into their pension plan. As with auto enrolment they have the right to opt out, but auto escalation has the behavioural advantage that workers do not miss money they have never had.
The proliferation of small pension pots caused by auto enrolment is another key issue we think the current government has only got half right. We agree with the government’s view that small pots – built up by employees with short periods of service – need to be automatically consolidated into schemes with low charges. But while the government’s 47-page automatic transfer proposal document talks about protecting against high charges, it makes no mention of safeguarding quality.
We believe transfers 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.
We also think the government’s definition of ‘small pot’ is too small. The proposed £10,000 limit is too low to be engaging to scheme members – given the rule of thumb that engagement kicks in when a pot approaches annual salary level, we think the limit should be £25,000.
Added to the new minister’s to do list should be extending some of the flexibility afforded to older savers to younger savers. In New Zealand, the government’s KiwiSaver workplace pension saving programme allows savers to make withdrawals to help fund a deposit for their first home or if they are seriously ill or suffering significant financial hardship.
With many young people being deterred from pension saving as they struggle to get a foot on the property ladder, giving greater consideration to initiatives such as these would be well worthwhile.
The last administration has achieved a lot in the course of the current parliament – but the job of securing a decent retirement for the nation’s workers is still only half done. Let’s hope the new minister hits the ground running.