Reviewing Auto Enrolment
Reviewing Auto Enrolment: AE now and AE in the future.
Reviewing Auto Enrolment: AE now and AE in the future.
The UK pensions industry has experienced a period of unprecedented reform following the implementation of Auto Enrolment but where is AE now and how do we foresee it in the future?
So far it has been impressive in getting more people to save, and the Government predicts that by 2029, there will be 13 million employees in the UK saving in a pension scheme.
The goal of Auto-Enrolment is to ensure a greater proportion of the UK population starts saving so they have enough funds available for an adequate retirement. So, if 13 million employees are predicted to be contributing to a relevant pension pot within the next 12 years, surely if the Government achieves this figure, then the goal has been achieved right? Perhaps not. This is where the fundamentals of the scheme become interesting as we may be saving more, but it may still not be enough.
There is a consensus that for adequate funds to be available when retirement time comes then, the minimum contributions need to be increased. I believe the Government needs to address this issue and I will explain why.
At the moment, employees are only eligible for Auto-Enrolment when they begin paying income tax – currently £10,000. When Auto-Enrolment plans were initially announced the tax threshold was £7,454, but since then the income tax threshold increased to £10,000. Subsequently, the number of low earners cut out of Auto-Enrolment has rocketed. Band earnings, set by the DWP between £5,772 and £41,865, disadvantages all workers and means that even when contributions increase, no one will get an 8% contribution. In fact, the most anyone will receive 6.9%, and even this amount will only be for those right at the top of the earnings band. Somebody at the lower end of the band will only receive a total contribution of 4.9%. Hopefully, this will be considered in the next AE 2017 review as it is a solvable problem. If the Government removes band earnings and bases contributions on all salaries, it will help boost savings by allowing all savers to receive the full 8%.
The DWP is keen to build on the success of Auto-Enrolment. The Pensions Regulator (TPR) has released figures stating that more than 7 million people have now started saving into a pension as a direct result of Auto-Enrolment and more than 340,000 employers have now completed their declarations of compliance.
However, I believe the DWP may experience some troubled waters ahead…
So far, it is the larger businesses that have been auto-enrolling its employees, and many of these will have had dedicated teams to ensure that they are made compliant by the staging deadlines. I am not so sure this efficiency will be commonplace in 2017. The largest number of employers, i.e. the smaller companies that are at the foundation of the UK economy and total over one million in number; will start to see their workplace pensions duties start and will need to enrol between now and 2018. I have already spoken to some business owners who are not even aware that they have a legal obligation to implement the scheme for its employees. Clearly, there is a major problem with awareness. Others employers do not know where to start or have any understanding of how time-consuming it can be to become compliant. Subsequently, I expect many of these one million will miss their staging deadlines. It will be interesting to see how upbeat the DWP are then about its success. Like the DWP, we can all celebrate scoring a goal in the 45th minute to lead a game 1-0, but football is a game of two halves and right now, in terms of Auto-Enrolment; we are not even at half-time.
Another challenge I believe Auto-Enrolment efficiency will face is related to Generation-Y / Millennials (people born in the 1980’s and 1990’s) and the Generation-Z / Post-Millennials (people born in the 2000’s). I think the number of these employees “opting-out” will increase in the future as contributions start to go up. The elevated contribution rates are likely to change the behaviour of both Generation-Y and Generation-Z employees because when they start noticing deductions on their payslips many will start opting out. This is because they will be at an age where they are start thinking of having children or buying a house. These things are expensive enough already, and when you are already being squeezed financially trying to afford the costs associated with childcare or with purchasing your first house; I believe it is highly likely that opting out will become the more attractive proposition. Pennies start to count!
Just for a second, let's imagine an Auto-Enrolment Utopia. In this world, all businesses are compliant, 13 million employees have enrolled and are contributing the full 8%, and no one is opting out. Sadly, even in this utopian context, figures and experts still suggest people will not be saving enough.
It will take years before contributions reach this 8% mark and even when they do; it will still be short of giving people a decent or "adequate retirement". I hope the DWP will address this in its 2017 AE review because this is going to be the big challenge going forward. The question is can the Government of the future ‘cross the Rubicon’ and raise contributions to 10% or 12% like they have successfully managed to do in Australia? If rates don’t increase then arguably, Auto-Enrolment pension’s reform has failed in its primary objective, which was to provide an adequate income in retirement.
The DWP plan to publish a report setting out policy recommendations towards the end of 2017. Let’s hope that the DWP recognise that Auto-Enrolment is not just about employees paying a pension contribution. That has been the easy bit. Moreover, the DWP needs to ensure people save enough, that everyone's represented, that full contributions advertised can be achieved and that people do not opt-in now only to opt-out later.
With all political parties behind the initial concept of Auto-Enrolment, it is important now that whoever wins the next election remains consistent in delivering the aims of the scheme. I believe it will need further reform and that contributions will need to increase for it to be successful.
Someone who has been instrumental in improving pensions and promoting pensions reform is Steve Webb who was the Liberal Democrat Pension’s Minister in the Coalition Government. Steve has just has been rewarded with a knighthood and he was pivotal in pushing through Auto-Enrolment. I would like to personally congratulation Sir Steve Webb (https://twitter.com/stevewebb1) for this achieving this deserved recognition. Without people like Sir Steve Webb behind pension’s reform in the future, sadly, I feel the more despondent about the likely long-term outcome of Auto-Enrolment and pensions in general for the future. A new Government in our new ‘Brexit Britain’ will want to undoubtedly make further changes to pensions reform and it is possible that Auto-Enrolment will change or even be scrapped altogether when a new "pensions solution" is brought to the political table. Let's be honest, when it comes to pension policy, the Government as a whole isn't exactly consistent.
• What do you think?