A new report “Pensions 2022 – a vision of the future” published by NOW: Pensions brings together the views of eleven industry experts and commentators, including Pensions Minister Steve Webb, on what they hope the world of pensions will look like in 2022 – ten years on from the introduction of auto enrolment – and what they believe needs to happen to make their vision a reality.
While the majority interviewed are supportive of the achievements of auto enrolment to date, there are concerns largely around the adequacy of contributions and the long term implications of the Budget.
Key themes:
1 Auto enrolment is working with more people saving for their retirement and low levels of opt-outs
2 Minimum auto enrolment contributions won’t be enough to provide a decent pension. The government needs to give consideration to auto-escalation and other measures such as the removal of band earnings or compulsion to improve savers’ pension pots
3 The Budget reforms could leave savers at risk of making poor decisions at retirement
4 Guidance needs to be a core part of the pensions landscape not simply an add-on
Commenting on the report, Morten Nilsson, CEO of NOW: Pensions said: “Auto enrolment has helped to set the nation on the right course. But, while the impact of the Budget reforms won’t be known for some time, one thing is certain – the nature of pension saving is fundamentally changing.
“With the government introducing greater flexibility in how savers use their pension pots at retirement, in 10 years’ time, my hope is that greater flexibility in the accumulation phase will also be introduced. Allowing savers to make withdrawals to help fund a deposit for their first home for example would help incentivise pension saving at a time when many are struggling with multiple demands on their finances.
“On auto enrolment specifically, if the goal is for a greater proportion of the population to be saving enough for an adequate retirement, we agree with the general consensus amongst those interviewed that minimum contributions need to be increased. However, it’s unlikely that the government will address this issue until post 2017 and any increases are likely be phased in.
“In the interim, we would like to see band earnings scrapped so that workers are automatically enrolled as soon as they start paying National Insurance. Band earnings has a corrosive effect on savers’ pension pots. The reality is no savers actually get an 8% contribution – the most anyone gets is 6.9% if they are exactly at the top of the earnings band, with somebody earning £15,000 only receiving a total contribution of 4.9% which is woefully inadequate.
“Removing band earnings and basing contributions on all salary would help boost savings for all and would remove a great deal of the administrative complexity for employers.”
Auto enrolment – establishing solid foundations
Pensions Minister, Steve Webb, echoed the views of many in supporting the achievements of auto enrolment to date. He said: “The lesson we are learning is that if we make it simple and easy for people to save, by and large they will see that it is in their best interests to do so.”
Nigel Stanley, head of campaigns and communications at the TUC said: “Auto enrolment is one of the biggest changes in the employment relationship in pension policy for many years and yet it’s been done without any controversy. It has been an extraordinary success – more successful than its architects expected – with opt-out rates lower than even the optimists predicted.”
Providing a decent pension
A number of contributors pointed to the fact that while auto enrolment was setting the UK on the right path, the minimum contributions were insufficient to ensure a comfortable retirement.
Dr David Blake, professor of pension economics at Cass Business School and director of the Pensions Institute said: “The 8% contribution rate isn’t enough and it’s still going to take years before contributions reach the 8% mark and that doesn’t provide a decent pension.
“The second strand of a ‘save more tomorrow’ plan is auto-escalation. The government accepted the first strand, auto enrolment, but chickened out of auto-escalation. Auto-escalation – the automatic increase in the contribution rate every year for 3 or 4 years – would in time provide the right level of contributions needed to produce a reasonable pension in retirement.”
Katie Morley, senior personal finance reporter, The Daily Telegraph said: “I’m optimistic in the sense that after 10 years most people will have some pension savings. However, the government has a lot of work to do if they want to ensure people have adequate pension savings. People have no idea what ‘adequate’ means at the moment. And I don’t think they are anywhere close to knowing what that means in their own context, either.”
The implications of the Budget
Reaction to the Budget was mixed with many sounding a note of caution as to the long term implications of the changes to the way savers can access their retirement savings.
Baroness Greengross, chief executive of The International Longevity Centre said: “Changes in the pensions system, such as increased flexibility of drawdown and greater freedoms over cash withdrawal may be ways to make people understand how important it is to save for a pension.”
Nigel Stanley, head of campaigns and communications at the TUC said: “As for a future landscape, until a few months ago, I’d have said we were optimistic about people saving more but we needed to address decumulation and think of different ways of paying out pensions. That was before the Chancellor threw a hand grenade into the current structures and while the annuity market has problems, blowing it all up without putting something in its place is not the right way to go about resolving these issues.
“The danger is we’ve now changed pensions into just another savings product, and we haven’t done what people actually wanted from pensions reform, which was to give them better and predictable income in retirement.”
Mick McAteer, founder, The Financial Inclusion Centre: “The big problem we now face is going to come from the annuity reforms. Consumers, more than anything, want to have the sort of certainty in their retirement income that annuities have provided. “These reforms only go to increase uncertainty for the consumer, create more fragmentation of pots and introduce much higher risk on making the right decision at retirement. I really fear that could put people off the idea of pension planning altogether.
“I’m very worried that people are assuming that just because they’re not buying annuities, they’re going to get much better value and at the moment there isn’t anything to indicate that. They’re likely to be entering into something that is significantly riskier. We need to be really careful of delivering bad outcomes as a result of these reforms.”
Pensions Minister Steve Webb concludes the report observing: “Looking forward 10, 20 or 30 years into the future, increased workplace pension saving will transform how Britain works and retires. Every employer will offer a pension and most people will take the opportunity to save into one – it will just be normal.
“We expect the increased participation to generate around £11bn a year in additional pension savings by 2020. This cash will be invested and help Britain have a stronger future.”
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