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01 Feb 2018
by Lee Hollingworth

Auto-enrolment pensions review: a good start but is it enough?

When the DWP published its Automatic-enrolment review 2017: maintaining the momentum report late last year, I absolutely welcomed its recommendations.

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It’s hard to argue (although some have tried) against both the reduction of the auto-enrolement (AE) starting age to 18 from 22, and changes to the AE framework so that contributions are calculated from the first pound earned (rather than the current lower earnings limit of £5,876).

Indeed, implementation of these recommendations is projected to bring an additional 900,000 employees into workplace pension schemes and a further £2.6 billion into UK pension saving.

The ultimate goal of the review was to improve members’ retirement outcomes and the primary lever for doing so has to be through effecting higher levels of saving. These proposals will certainly achieve that, particularly through the magic of compounding over the longer time period.

But are these planned changes enough? I don’t think so.

First of all it’s disappointing to learn that these proposals are nothing more than that, just proposals. Implementation will be left to a future government and is not expected until the mid-2020s at the earliest.

This delay in implementation will be at a great cost to those who are intended to benefit as they will miss out on many vital years of additional pension contributions. As a result we need to acknowledge the ‘lost generation’ of savers, those without the comfort blanket of defined benefit to support them, who have now been sentenced to likely poverty in retirement.

A tragedy is unfolding

Sadly, it will take this type of tragedy to unfold before policymakers wake up and realise the cost of putting short term politics ahead of the needs of the people.

Secondly, and looking on the optimistic side for a second the recommendations within the engagement brief for a simplified benefit statement should be applauded. Such measures may help individuals realise the reality of what retirement future is shaping up and take positive action. I did say optimistic!

For me, the three levers to deliver better outcomes in order of effectiveness are: legislation, followed by scheme design and then engagement with the individual.

Thirdly, I wonder if the review was a little ageist. While applauding reducing the minimum age of saving to 18, why haven’t we seen a similar increase to the maximum age limit too?

State Pension Age is increasingly looking out of step with today’s reality and indeed many are simply now accepting the need to work longer in the absence of a sufficient pension pot to draw on.

Next year sees AE minimum contributions increasing to 5% with a further increase to 8% in 2019, which is a step in the right direction, but there is still a long way to go (fingers crossed that opt-out rates remain low).

It would have been good to see some ambition here and acknowledge the fact that minimum rates will need to move even higher, a logical next step would be a process of further phasing to take us to the position of 12% in total.

This would be a more realistic figure to achieve an adequate income in retirement. Set at 12% we would begin to see a contribution total that will have a meaningful impact for employees’ retirement savings. At this level we would see far greater certainty of members reaching a target income that they can actually live on in retirement.

As is usually the case, these things are usually more easily said than done, but while I commend the recommendations, they just don’t go far enough. If we want to avoid that ‘lost generation’ there needs to be a much greater sense of urgency.

Lee Hollingworth is partner and head of DC consulting at Hymans Robertson.

This article was provided by Hymans Robertson.

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