Former pensions minister Guy Opperman recently left his post after more than five years in the role. His successor will have a tricky balancing act to manage in terms of boosting pensions saving through auto-enrolment during a cost-of-living crisis. The timing of this will be crucial.
Helen Morrissey, Senior Pensions and Retirement Analyst at Hargreaves Lansdown: “The first decade of auto-enrolment has been an enormous success. Well over 10 million people have been brought into workplace pensions and are building a retirement income that will help them be financially resilient in later life. In the run-up to auto-enrolment there were concerns that as many as one in three people could opt out of the scheme. However, such predictions have proved to be unfounded with opt out rates consistently around 10%, even when minimum contributions were hiked.
However, the way ahead is unclear. Government has been under pressure to announce a timetable for implementation for the 2017 Auto-enrolment Review. Initially planned to be introduced sometime in the mid-2020s the former pension minister Guy Opperman said the reforms would be introduced “in the fullness of time.” Meanwhile the ABI put forward ideas for how the minimum contributions levels could be increased to 12% in the coming years.
Opperman has since been replaced on the pensions brief and his successor will face a bulging in-tray and there’s every chance auto-enrolment enhancement could be kicked into the long grass. They will also face the very real headache of deciding whether now is the right time to expand auto-enrolment. The current cost of living crisis is causing many people real financial turmoil and there is every chance that making them put more away for tomorrow will take away from how they manage today.
Earlier this year we used the HL Savings and Resilience Barometer to model the likely impact of the introduction of the 2017 Review reforms as well as a step up to 12% minimum contributions. The results were startling – if the 2017 reforms were introduced in 2025, we could see a 3.5% increase in people’s long-term financial resilience by 2029. However, this would be offset by an immediate decrease in people’s surplus income of 3%, while rainy day savings (3 months emergency savings) would have decreased by 3.3% as would net financial assets by 2029.
The scenario is even starker if minimum contributions were increased to 12% with a 9.3% increase in retirement resilience being offset by an immediate fall in surplus income of 8.8%. Rainy day savings would fall by 9.8% and net financial assets by 9% by 2029. Lower income households are worst hit. Their retirement resilience would be boosted by 15.5% under the 2017 reforms but their surplus income would be immediately decreased by a massive 22.2%. At a time when it’s already hard to pay the bills such a hike in contribution rates could leave many in real financial difficulty.
Auto-enrolment has achieved real progress in its first decade and as it enters its second it could continue to help people build their long-term financial resilience. However, hiking rates too high during a financial crisis risks undermining what has been achieved so far.”
The way forward. We have proposed the following:
The government should press ahead with the 2017 Auto-enrolment Review reforms. However, they need to be timetabled far enough in advance so that any aftereffects from the current cost of living crisis have disappeared. The modelling suggests this should not happen before 2025.
Minimum contributions should not be increased further, instead government should look at how to get people to boost their contributions voluntarily when they are able to do so.
The potential to pay more into a pension and get a matching contribution from the employer could be an attractive incentive.
Previous HL analysis shows as many as six in ten people could be encouraged to boost their contribution if such an arrangement were available so we would welcome a further study to see the potential impact of these arrangements.
Such arrangements could be popular as people only increase contributions as they need to, and employer contribution increases are targeted towards those who value them.
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