The current pace of change in the UK pensions industry is unprecedented and in the midst of all this reform, envisaging what the pensions landscape will look like next year, let alone in eight years from now, is a challenge.
But, as auto enrolment gradually becomes part of the fabric of UK society, NOW: Pensions commissioned a report to examine what industry experts and commentators hope the world of pensions will look like in 2022 – ten years on from the introduction of auto enrolment and what they think needs to happen to make their vision a reality.
What is striking about this report is the overriding sense of positivity towards auto enrolment – it’s the right policy, and so far proving effective in getting more people to save.
But, as always, there is room for improvement and government, regulators and industry can’t afford to be complacent.
If the goal 10 years from now is for a greater proportion of the population to be saving enough for an adequate retirement, there is general consensus amongst those interviewed that minimum contributions need to be increased.
At NOW: Pensions we certainly share this view but believe it’s unlikely that the government will address this issue until post 2017 and any increases are likely to be phased in.
In the interim, there are some relatively minor changes the government could make that have the potential to make a big difference.
Firstly, the auto enrolment earnings trigger should be re-assessed so that savers are auto enrolled as soon as they start paying National Insurance – currently £5,772. At the moment, workers are only eligible for auto enrolment when they begin paying income tax – currently £10,000.
This was, in fact, the original plan. But, in 2012, the government decided only those earning enough to have to pay income tax should be included.
At the time, the income tax threshold stood at £7,454, meaning a relatively small number of people were excluded from auto enrolment by the change in policy. But since then the income tax threshold has shot up to £10,000 and will rise to £10,500 next year.
As a consequence, the number of low earners cut out of auto enrolment has soared. The DWP is currently consulting on this issue as there is some acknowledgment that aligning auto enrolment to income tax thresholds might not be the best approach moving forward. As part of this review, the DWP is also examining the upper and lower limits of “qualifying earnings” – this is the name given to a band of earnings used to calculate contributions for automatic enrolment.
For the 2014/15 tax year this is set by the DWP between £5,772 and £41,865 a year. This means that the first £5,772 of an employee’s earnings isn’t included in the auto enrolment calculation. For example, if a worker earns £20,000 their qualifying earnings would be £14,228. The maximum amount contributions can be based on is £36,093 (£41,865 minus £5,772) for the 2014/15 tax year.
As a result of the band earning approach, no savers actually get an 8% contribution – the most anyone gets is 6.9% if they are exactly at the top of the earnings band and just 3.4% if they earn £10,000 which is woefully inadequate.
Instead of reviewing the bandings, DWP would do well to remove them altogether. Basing contributions on every pound of earnings would help boost savings for all and would remove a great deal of the administrative complexity for employers.
Auto enrolment is working well but more can be done to make it more effective, particularly for those for whom auto enrolment was designed.