What the AE review chairmen are thinking about
At a glance:
- There appears to be no industry consensus on who should be enrolled
- Further contribution rate rises will not be addressed by the review
- Engagement is about building social norms and reinforcing messages
The three chairmen of the DWP's review of AE explain their key thinking around the future of the flagship programme. James Phillips reports
The industry is delighting in the successes of auto-enrolment (AE), with more than eight million workers having been enrolled into a pension since 2012.
Yet, the battle for adequate retirement savings is far from over, with millions of people excluded from the programme and contributions currently standing at a miniscule total of 2%.
The Department for Work and Pensions' (DWP) review of AE will cover these questions later this year, having adopted three independent chairmen to cover three areas of scrutiny.
Standard Life Aberdeen head of pensions strategy Jamie Jenkins is leading on coverage, Pensions Policy Institute director Chris Curry is analysing contributions, while Tesco Pension Trustees chairman Ruston Smith heads up engagement.
Speaking at the Pensions and Lifetime Savings Association's (PLSA) annual conference on 18 October, the trio explained the debates taking place.
Coverage
Many have questioned the barriers for entry to AE; employees are only enrolled if they are between 22 and state pension age, and earn over £10,000 through one job.
These criteria mean around seven million people have been found ineligible for the programme, and this figure does not include the self-employed.
Jenkins explains, however, that although there is agreement more people should be included, there is no consensus on who.
"We asked a question around should we exclude anyone from AE," he said. "[We were told] fairly overwhelmingly that would be a dangerous precedent. Most people agree that nobody should be excluded.
"When we asked who should be included and how, [there were] various responses. The self-employed is not a homogenous group. It doesn't necessarily lend itself to an easy solution. That has been quite clear in the feedback."
In particular, respondents to the review's survey were confused about the starting age being set at 22, while Jenkins said "there is little logic" for this.
There was widespread agreement that this should be lowered, yet a divergence of opinion was apparent as to whether this should be to 18, 16, or something else.
Contributions
Industry consensus is contributions under AE are a pittance, even when they reach the 8% total in April 2019. Yet, the proposed rate to provide an adequate income in retirement often varies between 12% and 16%.
For this reason, many were hoping the review would suggest an additional phase of contribution rate hikes. But, the review will not actually deal with this issue, instead seeking to understand how current plans will affect participation.
Curry joked that former pensions minister Richard Harrington said he had been given the "easy bit".
"The question about contributions does seem to be one of the easy ones," he said. "We have lots of evidence to say that if all that somebody does is save the minimum, they are not likely to end up with that they might consider an adequate income in retirement. That shouldn't be a surprise to anyone."
He added that myriad external factors need to be considered, such as the individual's state pension age and life expectancy.
"There is an awful lot going on that we need to think about. It is not something we can look at in isolation," he continued. "It is going to be difficult to come up with a single answer in the short term [so] it is right that the review has decided that now is not the right time to decide what should be the right rate in the future.
"What we don't know is how individuals are going to react when we see increases in contribution rates. We may see a change in that behaviour and so it is important that we have that evidence base."
Engagement
Nevertheless, at the heart of AE is a reliance on inertia, and so it is part of the review's remit to consider how to better engage members.
Curry explained the world is full of distractions, such as debt and personal circumstances, which can make this difficult.
"The objective is to see how we can create more personal ownership so people can make better and more informed choices," he stated. "There is no silver bullet; it is a real change.
"There are a lot of things that distract people and make things really difficult."
Smith added that inertia is often considered "the catalyst for people staying in". But he added that AE is building social norms, which can be more effective.
"Take the advertising campaign from DWP," he continued. "The work that employers and providers have done reinforce the policy. We started the process of social norming."
Nevertheless, we cannot create a culture of savings if we do not also make it easier for workers. Smith lamented the language used in pension communications, stating phrases such as "money purchase defined contribution retirement savings" do not cut through.
"We have created a legacy of jargon," he continued. "We are using different words, different language. We are using numbers in different places on a statement, those numbers are on a different date, and by the way we are using different assumptions."
And, with so many distractions in life, it is important that messaging is clear, concise and standardised. This is particularly true as, according to Smith, the average person receives around 105,000 words of information every day.
The three chairmen are tight-lipped on what these conclusions might be, but with the final report just weeks away, the industry will not have to wait too long to understand what might be the policy's future.
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