Catherine Howarth looks at what issues the auto-enrolment consultation should focus on
Nicola Sturgeon may be worked up over a lack of government consultation on Brexit, but over at the DWP they're doing their best to make up for it. The Department has just closed a consultation on the terms of its forthcoming consultation on auto-enrolment (AE).
The people in our industry whose job it is to toil over the drafting of submissions to government consultations could be excused for sighing at this richly layered process but it clearly does matter what questions the government decides to focus on.
A scan of the DWP's website suggests the AE review process will focus heavily on how to get more people enrolled, for example the self-employed and those in multiple jobs. Important as this is, given changes in the UK labour market, it would be a mistake to make it the main concern of this review.
The forthcoming AE review is an opportunity to build on the success of phase one by offering solutions to a different but equally important set of challenges.
The bigger questions, which happily also feature in the government's early thinking, are how to ensure savers already enrolled contribute enough, get good value from their schemes, and achieve sustainable investment returns from an asset management industry that puts their interests first.
AE is probably the single most ambitious and successful public policy of the last decade. This government, the coalition government, and the Labour governments that came before them have much to be proud of in conceiving and delivering the AE revolution. But the work is not complete, and the challenges of phase two are very different from those of phase one.
Phase one was a giant technical and logistical challenge predicated on clever insights from the field of behavioural economics. The nudging approach worked beautifully, and the industry can be applauded for successfully getting millions of people in hundreds of thousands of employers into pension schemes, with few technical problems along the way.
It made perfect sense in phase one to avoid anything extraneous to the central objective of channelling people into the system and having their contributions flow into capital markets on a timely basis.
That largely being accomplished, we have to acknowledge that most new savers are contributing at or near the minimum legal level, barely know they're in a pension scheme, and show little interest or emotional connection.
Phase two must address these challenges. If the power of inertia was the dominant behavioural logic of phase one, the power of choice and competition, good governance and communication should provide the logic for what now follows.
Let me offer one practical example. As an employee, I can tell my employer which bank I use and expect my salary to turn up in my chosen bank account each month. By contrast, under AE phase one rules, I cannot tell my employer where I'd like my pension contributions paid, at least not without the risk of losing my employer's contributions.
This results in a pensions industry at risk of developing a market discipline that serves the needs and preferences of employers rather than savers.
Among other reforms, phase two AE should put power in the hands of savers to choose their scheme. In Australia where DC savers can choose and switch, many still use a scheme selected by their employer. However, their right to choose results in a more saver-centric industry with higher levels of engagement among scheme members than in the UK.
The forthcoming AE review is an opportunity to build on the success of phase one by offering solutions to a different but equally important set of challenges. The government should embrace a bold phase two vision of a pensions system that earns the active commitment and loyalty of British savers.
Catherine Howarth is chief executive of ShareAction
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