The pensions auto-enrolment programme – which started in 2012 – has finally reached full contribution levels. After seven years, this radical overhaul of UK pension provision will be properly in place. It has been a widely-acclaimed success, with ten million workers newly saving in a pension scheme organised by their employer. But there are urgent issues to address to protect this success.
All UK employers must take responsibility for staff pension: Every UK employer must set up and pay into a pension scheme for their staff, deducting at least minimum levels of pension contribution from the pay of any employee over 22 who earns more than £10,000.. Workers can choose to opt-out, but so far few do.
Contributions increase to 8% of ‘band earnings’: Minimum auto-enrolment contributions for employers have just increased from 2% to 3%, and from 3% to 5% for workers (of which a quarter should come from a Government contribution – tax relief). Minimum contributions are 8% of so-called ‘band earnings’ – which is not total wages, but the earnings between £6,136 and £50,000 p.a. (the lower limit for National Insurance and the higher rate tax threshold). Therefore, low earners or part-time workers – mostly women – have very small pensions, not based on full salary.
Latest contribution rises shouldn’t cause too many more to opt-out: Increased pension contributions could reduce take-home pay, but I do not expect this to increase opt-out rates significantly, for several reasons:
- Higher pension contributions will coincide with the increase in personal tax allowance, offsetting the impact on take-home pay
- some workers will get a pay rise from this month to offset increased pension contributions
- many are paying more than the minimum levels, so will see no change
- when contributions doubled last April, there was no discernible increase in opt-out rates. The power of inertia impressively validated the behavioural theory behind the auto enrolment policy, which has been a key to the success of this pension reform. People, at the moment, just don’t bother to leave once they are in a pension scheme.
So will auto-enrolment solve our pensions crisis? Well, it’s a good start, but there’s much more to do to be confident the majority of people will have a good retirement income.
Minimum contributions too low to ensure good pensions: Auto-enrolment contributions are much lower than for traditional pensions – which means much lower and less reliable pension income. Anyone who thinks that the minimum contribution levels will allow a great lifestyle in retirement is in for some disappointment. Much higher than minimum contributions, starting ideally from the first £1 of earnings, would be needed to supplement the full state pension of under £170 a week. The pensions industry now has a chance to reach out to customers to encourage them to pay in more. I would hope that pension firms would reach out to these individuals to help them engage with pensions. Pension firms have little experience in Direct-to-Consumer marketing, but it is about time they rose to this challenge. They could also reach out to the self-employed, who do not benefit from auto-enrolment.
Most pensions will depend on investment returns, less reliable and no guarantee: As most employers have closed their final-salary-type schemes, workers will be in private pensions that depend on investment returns. The modern ‘Defined Contribution’ schemes place most risk on the worker, not their employer. Employees will need to monitor how their pension savings are performing and ideally work out a financial plan which they check regularly over time to see what type of pension they are on track for.
Accuracy of auto-enrolment contributions needs to be addressed urgently: As Chair of pensionsync, it has become clear to me that pension administration is not benefiting from the technology that could improve accuracy and security of contributions. Unfortunately, most administrators, especially for small firms, still upload information on manual spreadsheets and it is well-known in the industry that pension data are full of errors. This is a long-standing feature of pensions, but there is no excuse for the modern auto-enrolment pension schemes to be failing to use modern techniques to improve data accuracy. It is also disappointing that the Regulator seems to be turning a blind eye to this.
Pensions Dashboard project will fail if data are unreliable: If we are ever to get a Pensions Dashboard that is worth using, then pension contribution records have to be cleaned up properly and monitored for accuracy on an ongoing basis.
More needs to be done to improve women’s pensions: Millions of workers are still missing out on pensions at work. Those who earn less than £10,000 in one job – mostly women – are not auto-enrolled. People under age 22 are also left out. Finding ways to include these workers is important. I would be in favour of considering compulsory pension membership, so that all workers are included, regardless of gender or earnings, at least up to the minimum level.
Injustice of Net Pay schemes must be addressed urgently – to preserve confidence in auto-enrolment: I have long been warning about the potential scandal of lowest paid workers who are being forced to pay 25% too much for their pensions, because of the type of scheme chosen by their employer. These low earners surely need most help to afford to contribute to a pension, yet the industry and regulators are showing no urgency about addressing this injustice. If employers are enrolling a worker who earns under £12,500 into a Net Pay pension scheme (almost all MasterTrusts use the Net Pay system), then these workers will be inadvertently paying 25% extra for the same pension as those earning more than them. Employers have no legal obligation to choose a scheme that suits their low paid workers. Regulators have only worried about whether employers have chosen a scheme, but do not check whether the scheme is appropriate for all workers. Trustees and IGCs seem to feel they have no legal obligation to look after these low earners either. But surely there is a moral case for stopping this scandal, rather than just letting it run on.
The last thing we need is another scandal that undermines confidence in pensions: The Net Pay issue and data errors are two elements that could do just that. I do hope we can address them before it is too late.