Auto-enrolment has proved a great success in its first five years, says Chris Knight, but the financial services sector has much work to do to ensure Britain's workers actually end up enjoying a comfortable retirement.
Five years on from its implementation and nearly 10 years since it was first mooted in 2008, more than 10 million people are expected to be newly saving or saving more into workplace pensions by 2020.
More people are becoming engaged in their pensions and, importantly, are now saving towards retirement. In total, the Department for Work and Pensions expects around £17bn to be added to UK pensions every year by 2019/20 as a result of auto-enrolment.
Despite the achievement of signing up millions of people to pension schemes, however, there are a number of challenges that, as an industry, we need to overcome in the coming years.
For a start, contributions are set to rise next year. From 2018, employees will see their contributions triple from 1% to 3% of their salary, and rise again in 2019 to 5%. All the while, employer contributions, which currently match that of the employee, will instead rise to 2% and then 3% in 2019.
The question is, can we keep Britain's workers engaged in saving for retirement, or will increasing contributions lead to thousands of people ‘opting out' of auto-enrolment and returning back to stage one - that is to say, not saving for retirement at all.
The government itself has in fact anticipated the number of people opting out of auto-enrolment could rise from 10% to more than a quarter by 2019. The task ahead will be keeping consumers engaged in saving and educating them about the importance of saving for retirement.
Furthermore, with millions of people now signed up to contributing part of their monthly salary to a workplace pension pot, there is the potential for people to be lulled into thinking this alone will be enough for retirement.
The auto-enrolment initiative could mean more people than ever before are saving for later life, but we still need to educate consumers about best practice when it comes to making the necessary savings for a good retirement income and encourage them to put away more than the bare minimum.
Auto-enrolment was never meant to be the be-all and end-all for securing a comfortable retirement. Research has shown employees need a combined contribution of 14% if they are to enjoy a comfortable retirement - nearly double the total 2019 contribution rate.
Going forward, this will be a challenge for the industry - encouraging consumers to sacrifice more of their monthly salary for the future. This is particularly important for those who may have joined a defined contribution scheme only upon their employer undertaking auto-enrolment, and who might therefore have put few savings aside for the years after work.
Whether we are advisers, employers or providers of retirement income solutions, education will be central to highlighting retirement realities to Britain's workers and to encourage them to make these sacrifices.
We also need to ensure individuals receive the valuable advice they need to plan their retirement income. Auto-enrolment might have put millions more people in the position of saving for retirement, but it is up to the industry, including advisers, to help customers make the most of that pension pot.
There is plenty of research that shows thousands of people are continuing to approach retirement with little idea of what to do with their pension fund and, as a result, taking a ‘path of least resistance', according to the Financial Conduct Authority. While, in the past, this meant taking an annuity with their existing provider, now thousands are sleepwalking into drawdown.
Some people who take the drawdown option are primarily focused on it as a means to access their tax-free cash - they may not subsequently draw down income for quite some time. Meanwhile their pensions savings could be subject to significant investment risk - knowingly or unknowingly.
So, how can we address this? Clearly, we need to give consumers clearer pathways to guidance on their retirement income and at appropriate times. Not only does that mean signposting individuals to initiatives such as the pension dashboard - if and when that comes to fruition - and Pension Wise, but also early engagement.
After all, pensions freedom might have given consumers choice in how they use their pension fund but, with more individuals now accessing their pots earlier - and potentially at 55 - should we be communicating with individuals about retirement income from age 50, before they lock themselves into unsatisfactory retirement? Starting from around 50 would certainly tie in well with the ‘mid-career review' that was recommended by the recent Cridland report into the state pension age.
Once we have people engaged, we need to work hard to keep them engaged. Retirement-related financial decisions are much less ‘one-and-done' than they used to be. Drawdown requires continued advice and engagement and we expect many people will want to transition from drawdown to guaranteed annuity income as they grow older.
A holistic view
At the same time, new sources of wealth in retirement provide an opportunity for intermediaries to show the value of professional advice. For many people, their property remains the largest source of wealth they hold but, whether it is to pay for later life care or just to support their day-to-day costs, housing wealth might need to be accessed at some point in retirement.
I would encourage qualified advisers to think about including property equity in the discussion about later life, as well as providing consumers with a holistic overview of retirement income. That way, we can better help people to make the most of the money they have contributed throughout their working lives via auto-enrolment, as well as open their eyes to other possibilities.
To be clear, auto-enrolment has certainly been successful in what it set out to do - signing up millions of Britons to a workplace pension and getting them into the mode of saving at least the bare minimum for retirement.
There are challenges to overcome, however - particularly as contribution rates start to rise, and we still face the task of convincing British workers they will need to save even more. Ultimately, if we do not address these issues and if we fail to signpost the options for using that pot when they reach retirement age, the auto-enrolment project might just have been a wasted opportunity.
Chris Knight is managing director of Legal & General Retail Retirement
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