Willis Towers Watson responds to the Pensions Minister’s written statement announcing the scope of the 2017 review of automatic enrolment into workplace pensions.
The written statement says that the review “will be an opportunity to strengthen the evidence around appropriate future contributions” but that policy decisions are not expected during 2017.
David Robbins, a senior consultant at Willis Towers Watson, said: “The contribution increases due in 2018 and 2019 come after a ‘lost decade’ for real wage growth. We would not expect opt-outs to rocket when contributions rise – inertia is a powerful force – but uncertainty around this provides a good reason to postpone decisions on further increases, and (from HM Treasury’s point of view) to limit the amount of tax that people defer by saving in a pension.
“The most likely outcome is that this will be a ‘Lord, make me chaste, but not just yet’ review, which helps make the case for contributions to rise at future date. However, if there were a major change to the qualifying earnings band, this could deliver big increases in the cash value of contributions for many people by the back door. For someone earning £20,000, requiring all employers to calculate contributions from the first pound of earnings would have the same effect as increasing the headline post-2019 contribution rate from 8% to more than 11%.
“If the Government wanted employers to enrol the lowest-earning part-time workers, it would have to change the earnings band to prevent the deduction of risibly small contributions. However, the argument for widening eligibility is not clear cut. The New State Pension provides an income of just over £8,000 per year, so it’s not an open-and-shut case that people with earnings around that level should be encouraged to transfer income from the present to the future.”
Make member engagement about substance, not provider choice
The written statement says that the review will “consider how engagement with individuals can be improved so that savers have a stronger sense of personal ownership”. Again, decisions will not be taken in 2017 – which might suggest that radical measures will be considered.
David Robbins said: “Automatic enrolment needs a big push on engagement – it is great at getting people into pensions but the risk is that people think the default contributions have been chosen for them, when they were set deliberately low. Efforts here should focus on getting employees to think about how much to save and how to invest – allowing and encouraging them to choose between expensively marketed provider brands would be a sideshow. Big employers help keep providers honest and reducing their role would risk leaving members to pay higher charges than they need to.”
Self-employed people
The statement says that the review will look at how self-employed people “can be helped to save for their retirement”.
David Robbins said: “You sometimes hear suggestions that self-employed people should be automatically enrolled, but this does not really make sense: it would mean instructing self-employed people who did not want to save in a pension to enrol themselves and then immediately opt out. Sensibly, the Government appears to want to avoid a pensions hokey-cokey for the self-employed and to focus on other ways of making retirement saving seem normal and easy.”
No mention of cash alternatives to minimum pension contributions
David Robbins said: “There was recently a kerfuffle when an NHS trust offered nurses a salary alternative to the money that it would normally spend on pensions. Current rules appear to allow this, though the Government has never spelt out that this is its intention. The introduction of the Lifetime ISA could make more employers consider doing something similar.
“This issue is not mentioned in the written statement. If it is to be opened up, employers designing benefit packages would like to know where they stand sooner rather than later.”
Commenting on the DWP’s auto-enrolment evaluation report published today Barnett Waddingham senior consultant, Malcolm McLean, said; “The statistical evidence in the review confirms what we already knew. Auto-enrolment has been a great success to date, in terms of the numbers who have enrolled and are saving for a pension for the first time. However, less so in relation to the amounts being contributed, which will clearly be inadequate for the great majority of savers when they finally reach retirement.
“The report indicates the DWP’s plans for the scheduled review of auto-enrolment in 2017. We hope that from this the growing self-employed population who are currently excluded from the arrangements will be brought in as a matter of urgency.
“It is clearly nonsense that small employers with a handful of staff should be required to set up and automatically enrol their workers into a pension plan and yet exclude themselves in the process.
“It is also disappointing to note that whilst the DWP will be reviewing the qualifying earnings bands and the age criteria there do not appear to be any plans to review the contribution rates at this stage – something on which the future success or otherwise of the whole project may stand or fall.
“Finally, on a more positive note it is good to see the review will be supported by an advisory board, enabling experts across academia and industry to provide insight. This is clearly one of the main flagship policies of the Government’s entire pension reform agenda and we must hope full and proper consideration will be given to all the factors before embarking on any necessary next steps.”
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