Fraser Smart, managing director of Buck Consultants, considers the challenges posed by automatic enrolment:
“The Government hopes to reverse the trend of a decline in the number of people paying into a workplace pension with the introduction of automatic enrolment, under which workers will automatically be put into a pension scheme and have to opt-out if they do not want to save. The Government hopes inertia will mean people do not generally opt-out and aims to increase the number of people saving into pensions by 11 million.
“Automatic enrolment is aimed at those earning in the lower to middle earnings bracket. The Government is 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. A dream which is bound to fail and die, but the Government hopes the bubble will not burst too quickly.”
Smart points out that automatic enrolment faces a number of challenges:
• Surveys have suggested that public awareness of automatic enrolment remains low
• Most people will be automatically enrolled into defined contribution schemes which rely on the purchasing of an annuity to provide a pension. Annuities are at an all time low and not expected to improve over the short to medium term. In addition defined contribution schemes are just not going to deliver as good an outcome as a half decent defined benefit scheme
• The minimum amounts being put into defined contribution automatic enrolment schemes, by employees and employers, are totally insufficient to provide adequate pensions even after the phasing in period when they reach the full minimum amounts from October 2018. The minimum rates will have to be raised significantly in the future if automatic enrolment has any chance of a long term future
• Automatic enrolment depends on the introduction of a flat rate state pension, for no one on lower earnings who is properly advised will pay into a scheme where the end result will simply mean a reduction in their means tested benefits without them receiving a penny more in pension. Yet yesterday the story broke the Prime Minister is concerned this is not a vote winner
Smart continues: “So even if the celebrity endorsements can successfully hammer home the “I’m in” message as part of the DWP’s latest automatic enrolment advertising campaign, and the Government’s aim of getting 11 million more people to save is achieved, and it’s a big if, a lot of those 11 million will be paying into inadequate defined contribution arrangements which are never going to achieve the aim of providing decent pensions at anything like state pension age.
“I would like to see a lot more emphasis on the likely return from paying into a defined contribution automatic enrolment scheme for the member, so they can make an informed decision as to whether staying in or opting-out is a sensible course of actions. Such an emphasis may also mean employers (and employees) are unable to get away with paying minimum contributions on a false assumption this is going to be acceptable.
“It’s not just improving the numbers of people savings for pensions that matters, its ensuring that those who are trying their best to make provision for themselves in old age are provided with adequate pensions.”
Smart concludes: “As things go, many of those 11 million are likely to find their fortunes always hiding, whilst their dreams of retiring fade and die.”
This blog, and others, can be found here
|
