Whilst the introduction of automatic enrolment on 1 October is to be welcomed it faces a number of challenges, according to Buck Consultants. Fraser Smart, Managing Director of Buck Consultants, says: “In our view, the Government’s aim of getting 11 million more people to save is extremely optimistic. Many of the millions who do start saving will be paying into schemes at levels which will not provide an adequate pension at retirement.”
Buck Consultants believes several areas of change are necessary to ensure that automatic enrolment successfully becomes the catalyst for transforming the retirement landscape and, in doing so, solves the looming pensions crisis:
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Over time, the statutory minimum contributions by employers and employees needs to be doubled
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Better scheme design and member communication to ensure the best result from the contributions being paid in
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The Government needs to commit to implementing a flat rate pension for all and we are calling today for the pensions industry to campaign for its introduction to be accelerated
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Employers require encouragement to fully engage with the automatic enrolment process to ensure a successful member outcome
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Employers would benefit from a clear picture of the benefits associated with taking on a scheme, plus a comprehensive understanding of their responsibilities in doing so
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A stable regulatory environment where all political parties are committed to desisting from the practice of imposing additional liabilities on employers
Smart continues: “Automatic enrolment is aimed at those earning in the lower to middle earnings bracket. The Government are relying on the fact that people will believe saving at or above the minimum rate, imposed by automatic enrolment, will provide them with an adequate pension. This is far from the case unfortunately.
“Someone aged 25 currently earning £30,000 p.a., for example, could expect to receive a pension, in today’s terms, of £5,000 from auto-enrolment. Assuming a basic State pension of £7,000 the total pension would be £12,000 p.a. which would provide a post tax income of less than £1000 per month. If the auto-enrolment rates were doubled, however, total retirement pension would be £17,000 p.a. This would represent 57% of pay for a more adequate replacement ratio that the 40% provided by auto-enrolment.”
Smart concludes: “I would like to see a lot more emphasis placed on providing the likely return expected from paying into a automatic enrolment initiated DC scheme for the member, so they can make an informed decision as to whether staying in or opting-out is a sensible course of action. Such an emphasis may also mean employers (and employees) are unable to get away with paying minimum contributions, on a false assumption that this is going to be acceptable.
“It’s not just improving the numbers of people saving for pensions that matters; it’s ensuring that those who are trying their best to make provision for themselves, in old age, are provided with adequate pensions.”
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