AUTO-ENROLMENT Five point plan
The auto-enrolment review needs bold outcomes to build on success, insists Duncan Howorth, Smart Pension
- there is no question that AE has been a success to date, with more than 7 million employees now enrolled and opt out rates less than most expectations
- the current AE review needs to be bold and to continue the job of building a sustainable second tier of retirement savings for the UK
- the next 12 months or so will see further challenges, so an ambitious plan is needed for the next steps.
Delivering sustainable pensions in the UK has not always been a political success, despite our early start (relative to other countries) with a strong private occupational system. The success to date of our auto-enrolment (AE) legislation and its implementation makes amends for prior policy errors. That is why the current AE review needs to be bold and to continue the job of building a sustainable second tier of retirement savings for the UK.
The universal state pension and the soft compulsion of AE provide two core pillars for retirement savings. These can then be supplemented by voluntary, supplementary savings from the individual – whether through tax advantaged channels or not.
There is no question that AE has been a success to date. The last five years have contained challenges, but with more than 7 million employees now enrolled and opt out rates running below most expectations, businesses, advisers, pension and payroll providers have all worked together to get us to where we are. The next 12 months will see further challenges. Where risks have emerged (eg poor compliance by some employers, a cottage industry of master trusts) we have seen prompt regulator or government attention.
My five points of boldness may not seem so radical – they are not. The boldness consists in ignoring the cries from vested interests and those who claim we will undo the good achieved to date by raising contributions and saddling business with higher costs and somehow linking this to Brexit.
While some surveys disagree, in the majority both employer and employee groups have applauded the success of AE and are supportive of the next steps needed to extend retirement saving to a vast majority of our workers and with contribution levels to deliver an acceptable level of replacement income in retirement.
Changing labour market
1 So what does bold look like? We need to extend the scope of AE to both the self-employed and the lower paid. In particular, as our labour market changes shape and the traditional self-employed sector is complemented by the gig economy, it is crucial to ensure that this large section of the labour market is welcomed and encouraged into AE.
2 We need to bring equity to the lower paid by ensuring that they get a contribution from government alongside other workers. Much has been said about the inequities of pension tax relief, but depriving some people of this only serves to extend that argument.
3 We need to lay the ground for the next level of contributions. A key success of AE has been the trailing of higher contribution rates and the phasing of their implementation. We know 8% is not enough and it would be wrong to leave the job half done by implying that it is.
4 There is no need to meddle. Competition is very much alive. On pricing, a balance needs to be achieved between fair charges and sustainable delivery by providers – with the charge cap working effectively.
5 Leave NEST to do what it was asked to do, and has done well. We may have spent mind boggling amounts of money on its creation, but there is no justification for an extensive expansion of its remit. It should be able to accept transfers so that its members can consolidate in the same way as with any other provider, but it does not need to have a new role in the wider pensions market.