Lee Hollingworth, Head of DC Consulting, Hymans Robertson comments on expert advisory group appointed to the automatic enrolment review:Enrolment to date has been a great success and we are pleased to hear that over 7.1 million people have been automatically enrolled in pensions since its introduction. This is a marked step in the right direction in encouraging people to save more and think about their long term finances.
“Despite the success, however, there is a danger that auto enrolment could be creating a false sense of security. Attention now needs to move from creating a savings environment to making this effective. It is encouraging that there is a group assigned to provide evidence on the strengthening of engagement of individuals with workplace pensions and looking at appropriateness of contributions. There is a risk that those who are paying in at the minimum contribution level of 2% could be under the assumption that it will provide an adequate income in retirement. This is unlikely to be the case. Our calculations have shown that a 25 year old earning an average salary of £26,364 who wants to gain an income of £20k in retirement would need to be making monthly contributions of £246 which is 14% of net salary. At 35 this rises to £404 (23%) and by 45 a man who hasn’t made any long term saving up to that point must save £826 (47%) a month into their pension and a woman will need to contribute £861 (49%).
“2018 will see contributions increase to 8%. While a rise from 2% to 8% is clearly needed to increase incomes in retirement, contributions could still be below the level required to achieve an adequate pension. It could also present risks. This increased percentage will mean a bigger hit on take home pay packets and as a result, particularly among younger and lower wage earners, there is a real danger that people could start to opt out. It will be vitally important that we communicate how much people need to save to avoid poverty in later life to avoid this exodus.
“The focus should also change for employers, from managing implementation to ensuring that their provider remains appropriate. Master trusts have proven the most popular arrangement. There are currently 87 master trusts, so there is a wide range to choose from and some are better quality offerings than others. This number is likely to fall to less than a dozen and this process will accelerate as a result of the Pensions Bill. The message to employers is therefore to be confident that they are with one of the longer term winners.”
Commenting on today’s announcement of the membership and terms of reference of the automatic enrolment advisory group, Steve Webb, Director of Policy at Royal London said: “The DWP has done well to bring in a wide range of pensions expertise to support the work of the automatic enrolment review. The advisory group has an important job to do in making sure that the review focuses on the big outstanding issues of automatic enrolment and not getting bogged down in the fine detail. The biggest issues that need to be addressed are the inadequacy of the 8% contribution level and the low and falling level of pension saving amongst the self-employed. The review also needs to consider whether levying contributions from the first pound of earnings would be the best way to give a meaningful boost to saving rates among lower earners. If the review does not move things forward in these three areas it will have failed”.
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