1st October 2014 is the second anniversary of auto-enrolment
Auto-enrolment has been a good start however millions are still going to be left behind unless government and the pension industry starts actively working on Auto Enrolment 2.0. Article from Hargreaves Lansdown.
In 2013 the DWP identified that in spite of auto-enrolment and the state pension reforms, over 12 million people are still under-saving for retirement; in fact the ground-breaking reforms introduced so far are estimated to reduce the under-saving population by just 1 million. Auto-enrolment has worked so far but has left many critical gaps including the self-employed Participation and contributions rates are inadequate. ‘Nudge’ needs to be supported with Active Engagement: AE 2.0. Budget reforms mean engagement is essential and the earlier the better. Hargreaves Lansdown recommendations for AE 2.0
Tom McPhail, Head of Pensions Research “A lot of good work has been done on pensions, including auto-enrolment, state pension reform and the Budget freedoms, but they aren’t enough. Looking beyond the next election in 2015, we should already be thinking about Auto Enrolment 2.0 and ways to fix the gaps left by the current reforms. We believe active engagement has to be a critical element of future pensions policy.”
4.68 million are employed by an employer who has passed their staging date, but have not been auto-enrolled because they weren’t eligible. This means that for now at least, they have already been left behind by auto-enrolment. A further 4.5 million self-employed have been by-passed altogether.
Many workers currently have just the bare minimum being paid into their pension accounts; a total pension contribution of 2 percent of their salary. Even when auto-enrolment is fully up and running, many will only have 8 percent of their salaries being paid into their pension. This is not enough. A savings rate of 12 percent or more of income towards long term retirement provision is necessary if they are to achieve later life financial security.
Most default funds may be a good ‘average’ strategy, the one likely to do the least harm to the most people, however it doesn’t mean that it is well-suited to each individual investor. Most investors could select an investment strategy better suited to their personal needs. Their tolerance to risk, their individual ‘decumulation’ needs (see below) and their willingness to pursue investment returns are all peculiar to each individual in the scheme.
Even before the Budget, it was already highly desirable for members to take an interest in their retirement fund and to arrive at the point of retirement both willing and able to make decisions about drawing money from their retirement pot. Following the pension freedoms, it is now critical that all pension investors actively engage with and take some responsibility for the decumulation of their retirement savings. This cannot happen in a vacuum, nor is it realistic to expect investors to make these decisions if they have no prior engagement with their retirement savings.
Auto-Enrolment 2.0: 5 policy specific measures to address the problem
We can already see the areas where auto-enrolment is failing. The AE review scheduled for 2017 should be brought forwards to as soon as possible after the election in 2015. It should be led by an independent expert, similar to the Turner Commission, to form a consensus on next steps. Further tools, such as auto-escalation can be used to take some of the pain out of increasing contributions, as can salary sacrifice (which saves on National Insurance costs). These further nudges can help, however they need to be ‘sold’ to scheme members in the first place.
Participation rates are particularly poor among the self-employed. An employee can boost their pension contribution through salary sacrifice: the self-employed should be offered the same scope to boost their retirement saving by making their pension contributions exempt from Class 4 National Insurance. Split employment shouldn’t mean no pension: opt ins are as important as opt outs. The earnings threshold for auto-enrolment eligibility is now so high that many part-timers are missing out. For some, this isn’t a problem as some very low earners shouldn’t be saving in a pension out of their modest income. For others though, this is a problem. The mother with two part time jobs, each paying £8,000 a year might be able to afford to save, she might benefit from saving but the auto-enrolment system has left her behind. More needs to be done to encourage non-eligible jobholders to opt in.
Supporting Measure to help deliver success
The state has created a new contract with workers: well-regulated retirement schemes, with tax breaks and employer contributions are one side of the bargain; the other side, which hasn’t been clearly enough articulated yet is that it’s your retirement, they’re your savings, if you don’t save enough, you won’t have enough to live on.
Communications, particularly where a decision is required from the investor, have to be simple. A good example of policy failure in making things simple is the Open Market Option and the pre-retirement wake-up packs. Less is more; by throwing out the long and complicated wake-up packs and replacing them with simple decision making tools such as the Pensions Passport it is possible to make it easy for investors to arrive at good outcomes.
Champions for the cause
Experience at setting up group pensions shows that member engagement and interest is possible but only if pension providers take the trouble to go out and meet employees halfway. Once upon a time, the unions might have done this, more recently pensions salesmen took on the job but at unacceptably high cost. Today, good pension providers such as Hargreaves Lansdown take the time to talk to auto-enrolment members about their retirement savings, this improves, understanding, commitment and engagement and ultimately leads to better outcomes.
People need help. Managing saving for retirement can be challenging, so the pensions industry has to do everything it can to take away the pain. This means telephone helplines with real people providing helpful answers, online tools, smart device apps, short forms with user friendly layouts and as far as possible pension providers should look to integrate their customers’ retirement savings with their wider financial arrangements.