The home secretary has suggested AE should be scrapped in the event of a no-deal Brexit. Darren Philp explains why this would be misguided
It was quite comforting, in a funny sort of way, coming back from six months gardening leave to see some of the same old debates and questions still raging in political spheres about auto-enrolment (AE) and how to get people saving for their retirement.
I'm referring here, of course, to Sajid Javid's recently reported comments about scrapping AE due to the uncertainty and disruption caused by a no-deal Brexit. My main reaction: what took the politicians so long to link the two? At a time of uncertainty and financial stress, what better way to save some money or reduce burdens on business by (again) pushing the retirement savings issue into the long grass?
As a nation we are significantly undersaving for our futures. AE and the reforms to the state pension go some way to improving the situation for future cohorts. But arguably it is already too little too late for some.
I remember being involved in conversations when I was at the Treasury back in 2007/8 at the height of the financial crisis and the temptation for the politicians then is the same as it is now…. And who remembers the - widely leaked and later published - Beecroft report during the early years of the coalition government that basically floated scrapping auto-enrolment for smaller firms?
However, all this talk in the event of a no deal Brexit would be misguided and a monumental mistake. Pensions and Lifetime Savings Association work from 2016 revealed that while AE delivers real improvements in retirement outcomes of millions of people, of the 25.5 million people then in employment:
- 1.6 million people are still at high risk of falling short of a minimum income standard in retirement
- 13.6 million people, are still at risk of not meeting their target replacement rate
And the much-vaunted government review of AE recommended extending its reach sometime in the 2020s to increase coverage and contribution rates by reducing the qualifying age from 22 to 18 and pension contributions counting from the first pound rather than the lower earning limit of £5,876. At the time the Department of Work and Pensions estimated their proposals would bring a much needed extra £3.8bn per year into pension saving, increasing the pension pot of the lowest earners by over 80% and that of the median earner by over 40%. However, as we all know, to ensure good retirement outcomes, it will need to be extended even further.
So what we are seeing is the Home Secretary risks falling into the usual trap when it comes to thinking about long term saving and pensions - hyperbolic discounting! It's falling at the first hurdle of political temptation by suggesting a short term fix that totally ignores the long-term benefit. Scrapping AE in the event of a no-deal Brexit would be catastrophic…. after all people still need to save for their retirement whether or not the UK is part of the EU.
AE is one of the most successful social interventions we have seen in the savings space for some time. So much so that other countries are studying the UK experience and looking to follow suit. Reversing, or even stalling, the reform process would be a huge mistake.
Brexit or no Brexit. Deal or no Deal. It would be a mistake that future generations would not thank us for. If I was writing this blog at the time of the World Cup then I'd be talking about own goals and snatching defeat from the jaws of victory. Sadly, it's a much less exciting game that's being played here - politics.
Darren Philp is head of policy at Smart Pension
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