Phoenix Group, the UK’s largest long-term savings and retirement business, is calling for a new Statutory Requirement to support long-term defined contribution workplace pensions adequacy. The requirement is intended to ensure the government considers whether current auto-enrolment contribution levels are achieving decent retirement outcomes and, if an increase is required, to assess whether economic conditions support an increase in contribution levels.
The call forms part of a new report Phoenix Group has published in partnership with WPI Economics: ‘Raising the bar: A framework for increasing auto enrolment contributions ‘. The report develops a robust framework that supports policymakers in determining how and when default contributions rates should increase to 12%, from the current rate of 8%.
The framework was developed alongside a wide range of stakeholders from across different sectors of the economy – including the Association of British Insurers (ABI), British Chambers of Commerce (BCC), the Trades Union Congress (TUC) and the Pensions and Lifetime Savings Association (PLSA) – and sets out a series of tests for determining the economic and financial conditions which would allow for default contributions rates to increase, as well as the conditions that would necessitate a pause.
These tests should be considered to ensure any future increases to contributions are sustainable and affordable.
The tests include:
• Start/ Go Tests – When is the right time to start moving from 8% to 12%
- Auto-enrolment opt-out rates are not above a certain threshold.
- Real Household Disposable Income per person (RHDIpp) has risen in one of the last two quarters.
- Vacancies are between 2% and 3% of total employment.
• Pause (handbrake) factors – whether increases should be temporarily paused due to extreme wider conditions
- RHDIpp has fallen every quarter for a year.
- Vacancies are above 3.5% or below 1.5% of total employment.
• Wider considerations
- Metrics, for example rising household debt among low-income households, that wouldn’t pause or stop contribution increases but the Government should address with wider policy measures.
The yearly analysis should be carried out by Government itself and involve engagement with representatives from employers, unions, personal finance charities and other key groups with an interest in pension contributions.
Current system is falling short
The UK is falling short in its financial preparations for retirement. Modelling from Phoenix Group’s longevity think tank, Phoenix Insights, suggests around half of defined contribution (DC) savers are not ‘on track’ for their expected retirement income, equating to around 14 million people.
While there is a broad consensus of the need for increases to default workplace pension contributions to support people’s retirement income prospects, there is no mechanism for doing this that balances the interests of savers, employers and the wider economy.
Andy Curran, CEO of Standard Life part of Phoenix Group comments: “Automatic enrolment has been a huge policy success, helping many more people to save for their future. However, research from Phoenix Group’s longevity think tank Phoenix Insights found as many as 18 million people in the UK are not confident they are saving enough to meet their financial goals in retirement.
“The single biggest lever we can pull to boost defined contribution pension savings, and improve retirement outcomes, is to increase minimum auto-enrolment contributions. At the same time, both UK savers and businesses are facing substantial economic challenges. But as we enter the second decade of auto-enrolment, it’s vital we keep the conversation about increasing contributions alive, looking at how and when this should happen with a solution for the future.
“We want people to have the best opportunity of having financial security later in life. Acting on increasing contribution rates will mean more people reach retirement in a better financial position and are less likely to rely on the state to support their income. This report outlines a practical approach to taking the necessary steps to set people up for a more secure retirement.”
Gail Izat, Managing Director for Workplace Pensions at Standard Life, part of Phoenix Group said: “Auto-enrolment has significantly increased the number of people with pension savings, and it’s now imperative that we extend our focus to include savings adequacy. It’s clear that minimum contributions need to rise above 8% to give everyone the chance of a decent standard of living in retirement, however moving at the right time is key to the ongoing success of the scheme.
“A yearly review into pension adequacy, laid out in law, is needed to structure our approach to balancing much-needed policy with the short-term pressures on employers as well as employees. Any move to boost pension provision will involve a trade-off, and it’s worth noting prior large-scale changes like the introduction of the minimum wage and the initial launch of auto-enrolment have passed with little incident and boosted people’s financial and general wellbeing, benefiting employers in the process. At the same time, we’ve experienced a swathe of economic challenges in recent years and decisions need to be taken in full context of wider economic conditions.
“Without action, we face ongoing under-saving issues across the generations as they move closer to retirement. We’re confident that the framework underpinning the call for the Statutory Requirement sets out a clear, pragmatic route for policymakers to propel workers' towards better later lives, while paying due regard to the needs of employers.”
Laura Osborne, Managing Director, WPI Economics comments: “To avoid the prospect of a bleak retirement for today's median earners, it is critical to increase auto enrolment contributions. However, the big question is 'when?', given the current cost pressures faced by both households and businesses.
“This framework takes a pragmatic approach, putting in place meaningful safeguards to ensure that increases in pension savings are only triggered as the economy improves. We believe this can underpin a consensus-based approach to ensuring more people enjoy a decent retirement.”
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