REBA Inside Track: Extending auto-enrolment is vital despite the cost – but only if it’s done right
Richard Holden MP’s private members bill on 5 January will put pressure on the government to extend auto-enrolment to younger and lower-paid workers. Everyone over the age of 18 (rather than 22) would be included in the legislation and the lower earnings limit (currently £10,000) would be abolished.
These changes are not new – they were recommended in a 2017 review and the government has agreed to the vague ‘mid-2020s’ to implement them. Holden’s bill is about forcing commitment to timescales.
The changes are not an overnight fix for employers, so more detail is sorely needed. In 2009, less than 25% of 22- to 29-year-olds had a pension; in 2020, that figure was 85%. Similar uptake among newly eligible younger workers, low-paid staff and part-time workers could increase employers’ pensions costs considerably.
The think tank Onward, which produced the Levelling-up Pensions roadmap behind Holden’s bill, believes the changes could net an additional £2.8tn for pension savers. My highly unsophisticated, over-simplified ‘back of a napkin’ calculation based on current 8% pension contributions with 3% from employers suggests the cost for business is £84bn.
Business will need time to adapt both to the cost and to put new processes in place to manage the eligibility changes. Onward’s proposed timeline starts this year with a freeze to the lower earnings limit – then phases it down gradually between now and 2026. And 18- to 22-year-olds would be brought into auto-enrolment from 2023.
Cost to business cannot be a deterrent to making these much-needed changes, but ensuring employees benefit from every penny of auto-enrolled pension is now a higher priority than ever.
There are three extra things that I believe the pensions industry, employers and providers need to do if extending auto-enrolment is going to make a real difference.
Change ‘how much have I got’ to ‘how much do I need?’ Paying into a pension is only effective if employees understand how much they need for retirement, and whether they are on track to achieve it. Without that information, it is near impossible to make pensions meaningful and to encourage people to engage with them. That means changing pension communications from meaningless numbers on a benefits statement, to helping people understand progress towards their long-term ambitions. The Pension and Lifetime Savings Association’s Retirement Living Standards is a useful starting point, with guidelines for a minimum, moderate and comfortable standard of living.
Help people keep track of their savings. To answer the ‘how much do I need’ question, employees need to keep track of their total savings, across all of their pensions from different jobs.
Pensions dashboards – technology that will help savers see all of their pensions in one place - will become more crucial than ever to help people keep track of multiple pots across a lifetime of auto-enrolment, across multiple jobs. The project has been a long time in the making, but according to its project timeline, we should see dashboards start to be available from 2023. This can’t come too soon.
Stop fee corrosion. Every time an employee leaves a job, the pension they saved continues to be managed by their former employer’s pension scheme (called a deferred pot) – with an administration cost. Ultimately that cost is passed onto savers, and is lost ground for retirement saving. New rules being introduced in April this year will see pots of less than £100 protected from fees, but this doesn’t begin to solve the problem.
Options to address this include centralising deferred pots, encouraging employees to take their pot with them each time they change job, or making it easy for employees to put all of their deferred pots into a personal pension. Each has pros and cons – but a cost-effective, easy to manage ‘default’ solution is vital if everyone is to benefit from auto-enrolment.
Clearly there is substantial tidying-up to be done to make sure the business cost of broadening auto-enrolment is money well spent. But Holden’s message of giving younger and lower-paid workers equal treatment when it comes to pension saving has to be a priority.
The author is Maggie Williams, content director at REBA.