Tom Selby, head of retirement policy at AJ Bell, has commented as the UK Government delivers a lukewarm response on hiking auto-enrolment pension contributions:
“The world was very different six years ago when the 2017 review recommended expanding the automatic enrolment reforms.
“While the Government says it remains committed to reducing the age at which employees qualify for auto-enrolment from 22 to 18 and ditching the lower earnings figure against which minimum contributions are measured, an implementation timetable of the ‘mid-2020s’ is purposefully woolly.
“The reality is that millions of households are struggling to meet day-to-day living costs. There are signs that inflation will come down in the coming months, but the latest CPI figure remains in the double-digits and the Bank of England’s target of 2% still feels a long way away.
“Auto-enrolment opt-outs haven’t spiked dramatically as a result of this yet, but AJ Bell research carried out towards the end of last year showed a third of workers could quit their workplace pension in response to rising living costs. This is the sort of scenario ministers will be desperate to avoid.
“Over the medium-term, boosting pension contributions will need to become a priority for either this Government or its successor. But given the pressure facing individuals and businesses, it is understandable the Government is equivocating over expanding auto-enrolment at this point in time.”
Tackling the pension saving gaps
“Auto-enrolment has been successful in boosting the number of people saving something for retirement, but both adequacy and coverage remain significant issues that need to be addressed.
“Millions of self-employed workers are not covered by the reforms, and many are saving little or nothing for retirement as a result. An Office for National Statistics (ONS) study published in 2018 found that almost half (45%) of self-employed workers aged 35-54 reported having no pension wealth whatsoever, compared to just 16% of employees.
“Among those aged 55 and over, the proportion of self-employed workers with no pension wealth improves a little to 30% – but remains well below employed workers (14%).
“Although the challenge here is clear, the solutions are less obvious. Trials exploring using nudge techniques to encourage people to save more for retirement have shown some promise but are unlikely to come anywhere near the step change in pension saving behaviour we saw as a result of auto-enrolment.
“The Work & Pensions Committee’s suggestion that Government consult on using the National Insurance system to effectively replicate matched auto-enrolment contributions for self-employed workers received a lukewarm response, with the Treasury warning introducing this would ‘present a significant challenge’ as new systems would need to be built to administer it.
“Aside from this practical challenge, hiking NI for the self-employed – with the option of diverting this increased tax into a pension – would also come with significant political risks.”
Tackling the gender pensions divide
“The Government has committed to coming up with an agreed definition of the gender pension gap, a small but necessary step in reducing the divide in retirement provision between men and women.
“The most effective solutions to the gender pension gap are likely to be found in the labour market.
“If as a society we are able to equalise salaries, career progression and caring responsibilities, we should naturally see the gap between the value of men’s and women’s pensions reduce.”
Small pot consolidation
“The Government also nods to the issue of small pot consolidation in its response, with industry trade bodies currently exploring solutions to a challenge that is only likely to become bigger in the coming years.
“Any automated consolidation solution will face the challenge of ensuring members do not substantially lose out, either by forfeiting guarantees or paying more in costs and charges at their new scheme. The fact this project is focused squarely on the automatic enrolment market and small pots should help reduce this risk.
“In addition, enabling pension consolidation initiated by individual savers needs to remain a key focus for policymakers and the industry. Pensions Dashboards should provide better visibility of retirement pots once they are up and running, potentially helping more people to combine their pensions with a single, low-cost provider.
“Doing this can dramatically reduce your costs and charges – particularly where your old pensions are held by legacy insurers. Reducing these charges can in turn can boost the value of your retirement fund by thousands of pounds over decades.
“Getting clarity over the advice/guidance boundary could also enable firms to give non-advised customers better, more personalised information on the potential benefits of switching pension provider, as well as any associated risks.”
- The Government has committed to implementing the 2017 automatic enrolment review recommendations…but refuses to set out specific timetable (Protecting pension savers—five years on from the pension freedoms: Saving for later life: Government, Financial Conduct Authority and Money and Pensions Service Responses to the Committee’s Third Report of Session (parliament.uk))
- The 2017 review proposed scrapping the lower earnings limit against which minimum contributions are measured and extending the reforms to those aged 18 and over
- The Government maintains this will be implemented by the ‘mid-2020s’ but the cost-of-living crisis has shifted savings priorities for millions of households
- Nudges designed to boost retirement savings levels among self-employed workers are being tested…but proposals to use the National Insurance system to replicate auto-enrolment would require a new administration system to be built
- Policymakers have, however, committed to finding an agreed measure for the gender pensions gap, which should enable more consistent monitoring in the future
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