By Dale Critchley, Policy Manager, Aviva
What makes this so interesting is that it’s the first real hurdle auto-enrolment has encountered. When it was launched in 2012 there were various doomsday predictions, such as:
- Huge numbers of people will opt-out. (They haven’t. Opt-out rates are below 10%)
- There will be a capacity crunch and there won’t be enough advisers and providers to take on millions of new savers. (This never materialised. Providers created digital systems to handle increased demand)
- Providers won’t be interested in small schemes with employees only making minimum contributions. (Again, not true. Although government-backed NEST has taken on a lot of schemes, some of the larger providers, such as Aviva, will accept companies of all sizes)
Auto-enrolment has been a genuine success. People worked out very quickly that when it comes to AE , doing nothing pays. More than 9 million people are saving into a workplace pension thanks to AE, and none of the predicted problems have appeared.
But contributions are too low. 2% of salary is not going to help many people achieve a desirable retirement. 5% is a positive step, but 2019, when contributions rise to 8%, marks what I see as the end of the beginning, not an end in itself. For most people 8% will still be too little and we have to focus on increasing contributions.
Aviva’s AE pre review published in November 2017 pushed for gradual contribution increases to 12.5% by 2028 and for the scope of auto enrolment to be widened to include those not currently covered, such as the self-employed.
The recent report into AE from the DWP, while not making any recommendations around contribution levels, did go some way to addressing the blind-spots of the policy. Our pre review recommended lowering the minimum age of auto enrolment to 18, to build a savings habit from an early age, and the DWP have agreed with this proposal.
DWP also announced the proposed abolition of the lower earnings threshold for contributions (at some point in the 2020s). This will mean that all employees will benefit from an employer contribution no matter what they earn. A great result for the low-paid and those with multiple jobs.
Currently, employers can choose to make pension contributions based on ‘qualifying earnings’. For this tax year that is £5,876 - £45,000. The removal of the lower limit has the potential to improve contribution rates across the board, not only for those in schemes using qualifying earnings.
Schemes using basic salary (i.e. from £0 but not including overtime, bonus etc), or total earnings (i.e. from £0 and including overtime, bonus etc), make contributions at a level based on qualifying earnings equivalence. If the lower threshold is abolished then it would seem sensible to increase the contributions for those using total earnings from 7% (after the contribution increase in April 2019) to 8%, and those based on basic salary to at least 9% across the board.
The changes announced by DWP are an ambition for the next 5-10 years but government needs to make decisions early to give employers the opportunity to factor any increased costs into long term plans and tenders for business.
Our immediate priority may be the increases in April, but once this hurdle is cleared we need to maintain our impetus and set a clear target in our pursuit of a decent retirement for everyone.
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