By Jamie Jenkins, Head of Pensions Strategy, Standard Life
Opt-out rates among employees have been around 10% so far, and even though recent analysis from the Pensions Policy Institute suggests they have risen to around 17% as smaller firms come on board, it is still well below the original predictions of 30% or more.
To take stock of auto enrolment, it’s useful to look at it in three distinct stages.
Stage 1
This was about testing the nudge, ensuring that big employers would champion the cause and that the process was workable. It also included the need to ensure that products and propositions were suitable, well-governed and competitively priced.
So far, so good. There is fierce competition amongst a number of established providers offering good propositions priced within a charge cap. Employers are doing their bit and the big firms have led the way, with SMEs and micros following in their footsteps, albeit with a little less enthusiasm.
Stage 2
There are probably over a million employers (including those people employing someone in a personal capacity, rather than running a business) who have yet to set up a pension and auto enrol their employee/s. There is undoubtedly capacity within the industry to deal with this over the next couple of years, but the will of these employers to comply has yet to be properly tested.
The bigger test, though, is the impact of contribution rates increasing. Employers will see their minimum contributions increase from 1% to 2% in April 2018 and to 3% by April 2019. They will have no choice in the matter and will clearly need to consider how this additional expense is met, especially in such a low wage increase environment.
For employees, their minimum contributions will move from 1% to 3% in April 2018 and then to 5% in April 2019. Put simply, someone paying £10 per month now could find themselves paying £50 per month. Or they could be paying £50 now and move to £250. These are significant changes in take-home pay and employees will have choice; unlike employers, they can opt out if they wish.
This is the real test of the nudge; whether people will stay in for the long haul as we move contributions to a more adequate level.
Stage 3
In 2017, the Government intends to publish a review of auto enrolment. Based upon the original timetable, this would have been after the last employers had set up a pension and coverage was largely complete, but some of the roll-out was deferred so it comes while there is still some way to go.
Regardless, it will need to address the big ticket questions as to what happens next.
Most people would agree that even when contributions reach 8%, this is still inadequate for medium to high earners and would leave many facing a significant income drop in retirement. And of course, many people will not have been saving all of their working lives, so will fall well short of a decent replacement rate.
The 2017 review will likely debate what an adequate savings rate is, and indeed whether it is the same for everyone.
There is also a growing number of self-employed people who are not covered by auto enrolment, primarily because they themselves have no employer to oversee the process, of course. Estimates are there are nearly 5 million people in this category and they are not all high earners with advisers and investment portfolios. Many are on relatively low earnings and are equally vulnerable to under-saving as their employed low-earning counterparts.
On the subject of low earners, consideration also needs to be given to people earning below the £10,000 threshold (before auto enrolment is triggered), and those with multiple jobs paying below this level (even where their total earnings exceed £10,000).
Looking forward
Beyond all this, debates will continue on the cost and distribution of tax relief, and indeed the role of other savings products such as the Lifetime ISA, when it comes to retirement planning. For now, though, the trusty pension is proving to be a very effective vehicle for people saving through the workplace.
Most striking perhaps, is the impact auto enrolment has so far had on participation in the private sector. According to the Department for Work and Pensions, only around 42% of people were saving into a workplace pension in 2012, and this has now risen to over 60%.
Ally this with the ensuing debate about the affordiability of ongoing Defined Benefit schemes and the changing savings landscape seems quite clear. Gone (or at least going) are the heady days of gold-plated pension provision for the few, and instead, we face more affordable pension provision for the many.
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