In this blog for IFA Magazine, Shelly Durrant(pictured), Associate Director, Communications at SEC Newgate, reflects not only on how far we’ve come since the introduction of auto-enrolment but also why she believes there is still further to go before people can genuinely look forward to achieving a decent standard of living in retirement as a result
Next month marks the 10th anniversary of the government’s flagship auto-enrolment policy (AE). More than 10 million people have been auto enrolled into a workplace pension scheme since the programme began in October 2012. But how successful has it really been?
When the initiative launched, it got many people saving into a pension for the first time in their lives. When someone mentions the word pensions, most people switch off because for those in their 20s and 30s, retirement, frankly, is of little interest to many of them. They might well be thinking why on earth would they need to worry about it now? Of greater interest to them are shorter horizon issues such as paying off a student loan, getting on to the property ladder, purchasing a car, treating themselves to a holiday, plus other things that money is needed for and that they might want to achieve whilst young. So, for many, saving into a pension is not a priority on the list and is something they might think people get round to in their 40s. But by waiting till then, as advisers will know all too well, the individual will lose virtually all the wonderful benefits and compounded returns that long-term retirement saving can bring.
In this sense, the introduction of the UK’s workplace pension has been an unrivalled success in helping to bridge the gap and encourage people, who wouldn’t normally have saved into a pension, to do so.
A successful problem to have
However, great success often brings its own challenges. For auto enrolment, one of the biggest has been around the contribution levels. Despite the minimum that can be paid into workplace pensions edging up over the years, it’s still not enough to support people’s retirement lifestyles when the time comes for retirement. We read time and again, that as a nation we don’t save enough into our pensions and millions are likely to find themselves falling financially short in retirement.
The minimum total contribution is 8% of qualifying earnings, with employers paying at least 3% and employees, who benefit from tax relief on payments, making up the remaining 5%. Unfortunately, many people haven’t quite woken up to the fact that the amount saved via auto-enrolment alone, is not going to be enough to support their retirement needs.
Going a step further
Logically, the next step should be to raise the minimum contribution further to help people to build a decent retirement income upon which they could fund their living expenses. Some would argue that the contribution level needs to increase to as much as 12%.
This will be no easy feat and not made any easier with the huge cost-of-living challenges which so many are now facing. It should be no surprise that we are seeing many workers going the other way and currently reducing their contribution levels or putting a stop to them altogether.
The focus for the next 10 years needs to be about adequacy. People genuinely don’t understand what an adequate level of income in retirement is and how much they need to put aside on a regular basis in order to achieve it. To my mind, this means that the work of the workplace pension is only half done; there’s so much more that can be and needs to be done.
Don’t look at me for the answers though
But I’d argue that a good place to start is for employers, regulators, and providers to explicitly employ language that compels people to see later life – and the financing of it – just as importantly as they do their ‘present’ life.
Currently, it seems that the majority of people do not. And that’s where I believe that the financial advice and investment professions can help by reaching out with our communications and messaging. By doing so, we can help to ensure that planning for retirement is given the attention which it so clearly deserves if people are to enjoy a retirement where their standard of living doesn’t end up being a huge disappointment.
About Shelly Durrant
Shelly has specialised in wealth and asset management for over ten years. She has worked with a diverse portfolio of both B2B and personal finance clients across a wide range of sectors, including pensions, insurance, wealth and asset management. Clients have included Vanguard, Momentum Global Investment Management, Nikko Asset Management, St. James’s Place, JM Finn, Thomas Miller Investment, and Sackers.