As the government's review into AE kicks off, how should the policy progress post-staging? James Phillips explores the industry view
It has now been nearly five years since the auto-enrolment (AE) regime launched a landmark campaign to get more people saving for retirement, becoming a roaring success with 68% of the workforce now putting money away.
We have seen the monster 'Workie' walking around parks promoting the benefits of a workplace pension to employees and employers alike.
Now the Department for Work and Pensions has bedded in for its first formal review of the programme, focusing on three themes: coverage, engagement, and contributions.
As the review closes to submissions, here is what the industry wants the government to consider.
The review is first asking whether AE's remit is wide enough, considering whether the minimum earnings trigger - currently £10,000 - should be reduced, and if total earnings should be used, rather than earnings from each individual workplace.
This has been a common criticism of the current regime, with many noting how the current policy disproportionately affects female workers, who are more likely to be in part-time employment. These workers may earn over the £10,000 trigger through multiple jobs, but do not qualify because the earnings in one job are not enough.
Aegon head of pensions Kate Smith says the AE programme needs to be much more inclusive.
"AE should not be an exclusive club just for those people who happen to be at the right age or earn the right salary," she says. "Everybody should have the opportunity to benefit from AE and that includes the employed and self-employed."
She suggests the best way is to remove the earnings trigger and reduce the age threshold from 22 to 18-years-old.
Hargreaves Lansdown agrees, although senior pensions analyst Nathan Long says the threshold should not be removed completely.
"This should be aligned to the new state pension," he argues. "If you earn less than the new state pension, the income you'll have when you get to retirement will be the state pension.
"If the state pension will be more than you're currently earning, there's no need to save further. It's a more appropriate line to draw in the sand than the £10,000 we have at the moment."
Furthermore, the government should use its recent U-turn on National Insurance contributions to consider how these could be used to get the self-employed into pensions.
Both Aegon and Hargreaves Lansdown believe the three-year window before the general election could be used in this way.
"It will be politically unpopular but it's about seeding ideas into the population's mind-set, so gradually they get used to it," Smith continues. "It does give breathing space to design more joined-up holistic policy and that must be a good thing for the longer term."
Yet this belief is not uniform, with Salvus Master Trust managing director Graham Peacock disputing that the AE review should consider the self-employed.
"The self-employed are not in the remit of AE," he argues. "AE affects workers. This is enshrined not just in the legislation but in AE's ethos. It was about the workplace and corporates, and people who are employed.
"You cannot compel somebody who has chosen to employ themselves to provide for their old age."
The review's second discussion topic centres on when and how to engage with members, especially with many saving into a pension for the first time.
Hargreaves Lansdown believes the AE programme could better engage younger people if it recognised their other desire: to own a home. It argues savers should have limited access to their pensions in order to fund a deposit.
Long says: "The big problem we have with the younger workforce is they tend not to be interested in pensions. If you're engaging people at an earlier age by saying this is your retirement plan but, not only that, you can use it for your first time house purchase, then what you're doing is focusing the energies and enthusiasm of saving.
"It gets younger people interested and used to pensions far earlier than at the moment."
However, these savers would only be able to use their own contributions and Long suggests there should be a cap on how much they can withdraw for the purchase.
The AE review also questions how to ensure employees remain engaged in pensions when moving jobs, particularly if they have opted for a higher rate than the minimum requirements.
Aegon proposes P45s should include information on their previous pension arrangements, and employees should then automatically be enrolled at that figure or their new employees' contribution rate, whichever is higher.
"This would encourage employees to continue to pay the higher contribution and not dropping down," Smith explains. "If you have it on the P45 that Joe Bloggs paid 10%, then going into this new scheme he still pays that."
However, for some employers there is a waiting period where new employees may not be eligible to join their pension scheme for up to three months.
"The government needs to be much more pro-saving and encourage different behaviours," Smith states. "They could change the legislation and get rid of the waiting period."
Nevertheless, she notes, for some sectors where workers may move around a lot and a pension scheme may not be appropriate, this is a useful tool.
The review also hopes to understand how best to increase savers' contributions into their fund, and if a flexible approach could improve the retirement journey, particularly after total contribution rates hit 8% in April 2019.
This final point is perhaps one of the most important areas, with two-thirds of this week's Pensions Buzz respondents naming it the area that should get the most focus in the review.
The Institute and Faculty of Actuaries (IFoA) believes the adequacy of contributions is pivotal for AE to be a success. It supports nudge policies such as auto-escalation, where contribution rates increase in line with wages, and encouraging employers to reward employees who save more.
President Colin Wilson says contributions need to be addressed as soon as possible before an inadequacy problem comes with an aging population.
"The IFoA has first-hand knowledge of the impact of AE pensions, and of the wider issues surrounding pensions adequacy." He points to an IFoA survey, which showed 42% of savers had done no retirement planning.
The institute also notes how contributions will be unequal, despite most employers currently matching or near-matching. The IFoA expresses concern that the AE programme could actually reduce employer contributions.
"This is clearly unsustainable, and we therefore call upon the government to do everything they can to ensure everyone who retires in the UK does so with adequate provision for their old age," Wilson continues.
On the other hand, Salvus' Peacock says now is not the right time to consider changing contributions, and the government has already missed the boat on getting contributions right.
"Matching would have made logical sense from the beginning," he says. "The campaign of 'if I pay in, my boss pays in', implies your boss pays in the same amount. Matching is clearly something that is a positive as an employer and should be at the heart of AE."
Bringing a greater number of people into pensions is clearly one of the industry's major concerns, alongside increasing contributions in the longer term. Yet, consensus on the extent to which both of these should go still needs to be built.
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