Government review of auto-enrolment pensions
We’re expecting the government to publish the results of its 2017 auto-enrolment review next week, probably Monday 4th December. You can find information on the review here.
Ahead of publication, here are some comments and pointers on what we may see in the DWP’s paper.
The review focuses on 3 broad aspects of auto-enrolment:
These are explored in more detail below.
Hargreaves Lansdown comment
Tom McPhail Head of Policy: "This review comes at an acutely sensitive time. Auto-enrolment has helped millions to get their feet on the first rungs of the retirement savings ladder. There are still big challenges to be met and it is important they are addressed as quickly as possible, however Ministers will be understandably wary of doing anything which might cause friction with Brexit. Overall savings rates are too low and many scheme members have only a poor understanding of how their pensions will meet their needs. Millions of self-employed and low paid workers are still not benefiting from the generous tax breaks on offer."
"We are also particularly concerned for those due to reach retirement age over the next 20 years, they were born too late to get the full benefits of final salary pensions, but too early to benefit from a full working life of auto-enrolment."
"The government is mindful of the risk of increasing opt-out rates and so will almost certainly avoid making any firm pronouncements on how it proposes to increase savings rates until after 2019, when contribution rates will have risen to 8% of earnings."
Context: Auto-enrolment progress so far
The number of employers who have completed their auto-enrolment declaration of compliance has reached 855,895, covering a total of 27,713,000 employees. This has resulted in 8,833,000 people being enrolled, adding to the 10,639,000 who were already in a pension.
However, 7,806,000 people working for these employers have not been enrolled because they did not meet the eligibility criteria (Source The Pensions Regulator). In addition there are around 5 million self-employed who fall outside the auto-enrolment programme.
The government has already confirmed that the current default fund charge cap will be kept at 0.75%.
Good work has been done on improving the quality and clarity of communications sent to pension scheme members. In particular we expect to see the DWP advocate the adoption of a simple, one-page annual statement which clearly sets out how much an employee has saved in their workplace pension and what retirement income they might be able to look forward to.
We’d like to see more from this review on investor engagement, in particular:
- Member engagement should be an explicit requirement from pension providers. We’d like to see trustees and Independent Governance Committees assess schemes on how well they are engaging members.
- Individuals should be given the freedom to choose the pension provider to whom their employer pays their workplace pension contributions. Individuals wouldn’t have to exercise choice and where they don’t, the current auto-enrolment defaults would still apply. However to encourage greater engagement with retirement saving, employees should have the right to take ownership of their pension, rather than having to accept the scheme chosen for them by their employer (get in touch if you’d like a copy of Hargreaves Lansdown’s briefing paper on this issue).
In the wake of pension freedom, and with millions now having to take responsibility for ensuring they are saving enough and investing their money wisely, good member engagement has gone from being a ‘nice to have’ to absolutely essential.
As indicated above, in spite of the undoubted success of auto-enrolment, many millions of people are still missing out.
The Self-employed were promised inclusion in auto-enrolment in the Conservative manifesto, however the practicalities have continued to prove difficult. The Treasury is not enthusiastic about using the tax or NI systems to levy payments (HMRC probably wouldn’t be keen either) however there is no other ready-made mechanism to deliver the same kind of nudge solution which is working so well for employees. It is possible technology will deliver; the Taylor review of employment practices suggested the possible future use of employment platforms for the gig economy, and these could be harnessed for pension purposes however this is at present all theoretical.
Low earners are excluded by virtue of the current earnings trigger which stands at £10,000. Employees under age 22 and over state pension age currently miss out on being enrolled in a pension (though some may be included by employers who make the effort to bring them into a pension).
It is expected that all these thresholds will be extended to bring more people into the system.
Average Defined Contribution pension contributions have fallen sharply in recent years from a typical level of around 9% of earnings before auto-enrolment to just 4% today. Typically employers were paying around 6% and employees around 3%; as a result of the diluting effect of millions of new auto-enrolees coming in on minimum contributions (currently just 1% of salary each from employers and employees), the average has dropped.
Contributions will rise next year and again in 2019 when they will reach 8% of earnings (split 4% from the employee, 3% from the employer and 1% in tax relief from the government. These contribution rates are widely recognised to be at the bottom end of adequacy. For millions of savers, a contribution rate of 12% to 15% of income will be necessary to ensure they can retire at a time and in a manner of their own choosing.
The auto-enrolment review will add to the evidence base on savings adequacy, without making any firm recommendation to the government as to what steps they should take from here on to increase savings rates.