Following the release today of the ‘Policies to improve employees’ retirement resources’ report from the Institute for Fiscal Studies(IFS), Jon Greer, head of retirement policy at Quilter, has shared his reaction to the detail as follows:
“Automatic enrolment has undoubtedly proved to be a huge success, bringing millions into the pension savings fold. However, as the IFS outlines, many are still simply not saving enough. In recent years, reforms have been challenging, given the cost-of-living crisis that has stretched finances in ways many had not experienced before.
“Auto-enrolment largely relies on people’s inertia, but significant financial pressures today may prompt individuals to reduce or stop pension funding altogether. Therefore, there is a fine balance to be struck with AE reform. We know that many in the UK are at risk of having inadequate savings to fund their desired lifestyle in retirement. This is particularly true for under-pensioned groups, such as the self-employed, who are less likely to have private pension savings to supplement their state pension.
“The IFS’s suggestion to ensure employees receive an employer pension contribution of at least 3% of total pay, irrespective of their own contributions, is worth consideration. This would benefit the 22% of private sector employees who either opt out of their pension scheme or are not automatically enrolled due to low earnings. However, there is a risk that this could lead to more employees opting out of making their own contributions. A trial approach, as suggested by the IFS, could be a prudent way to assess the impact before full implementation.
“The IFS’s suggestion of using the pensions ‘sidecar’ model for lower earners is interesting and worth considering. There are slight risks of the sidecar proposal that are well known. Diverting some pension saving to a liquid account will impact the amount saved for retirement, but arguably offset by ensuring more people save long-term. It’s not clear that it would increase engagement and therefore some may not even know about the liquid sidecar that could be used as a rainy day fund, and those that do may be tempted to draw on the money other than for the intended purpose.
“Expanding the age range for automatic enrolment from 16 to 74 is another commendable suggestion. This would help more people in paid work save for later life, ensuring that younger workers start saving embedding long-term savings as a social norm earlier, and older workers continue to build their retirement funds.
“The IFS also proposes to increase default employee contributions for those on average incomes and above, while protecting lower earners. By targeting higher contributions on earnings above a certain threshold, such as £35,000, we can help middle and higher earners better supplement their state pension without unduly impacting those who can least afford it. However, there will be cohorts, such as those earners leaving university with large student loans, who may still feel this puts too much pressure on take home pay.
“Raising the upper limit on qualifying earnings, which has been frozen at £50,270 since 2021-22, is also a necessary reform. The real value of this limit has fallen significantly. Indexing key parameters in the automatic enrolment system to average earnings growth would futureproof the system and ensure it remains relevant and effective.
“While the IFS’s proposed reforms present a balanced approach to enhancing auto enrolment, it is crucial to consider the broader economic context and the potential impact on individuals’ financial behaviour.
“For anyone concerned about their level of saving for retirement, the best thing to do is start planning as early as possible. Think about the kind of income you want to achieve your desired standard of living and then work backwards by projecting how much you’ll need to reach that target and finding a way to save toward that long-term goal. Inheritance should be treated as a bonus.”
