Auto enrolment 5 years on
The DWP has published a review of the auto-enrolment workplace pensions scheme and proposals to maintain the momentum. Rosalind Connor analyses the findings and assesses the implications of the proposals.
Why did the government carry out a review of automatic enrolment?
Automatic enrolment as set out in the Pensions Act 2008 (PA 2008) is now largely complete – although it has been a long time coming. Starting in 2012, the final employers will be auto enrolled by February 2018, with contributions rising in April 2018 and 2019 to reach the levels envisaged in the Act (8% in total, of which at least 3% needs to be from the employer). This provides a practical opportunity to see what has happened. The review was announced by Damian Green, the then Secretary of State for Work and Pensions in December 2016 as a review to be conducted and published in 2017 and came out at the same time as the annual evaluation report of auto enrolment. In many ways, it is seen as a balance to the Green Paper on defined benefit pensions, showing the government is considering both the defined benefit and the defined contribution environments.
In addition, there is a statutory requirement under PA 2008 to carry out a review of the ‘alternative quality requirements’, that is, how good a pension arrangement has to be for its members not to be auto enrolled, by the end of 2017. The DWP has combined this into this review, and has generally held that the alternative quality requirements are sufficient.
What were the main findings of the review?
The review found, as all the evaluation reports have previously found, that the effect of automatic enrolment has been to greatly increase the number of people saving for a pension, and that it has assisted under-represented groups, such as the young, part-time workers, women and particularly those on low to moderate incomes. In general, this has been hailed as a policy success.
However, the paper notes three particular issues. The first is that savings are for many people very unlikely to meet their own expectations for retirement. Put simply, people underestimate the amount they will need to save for retirement and tend to assume that auto enrolment will provide for a comfortable old age even at the minimum rates. The issue of undersaving particularly hits young workers (auto enrolment starts at age 22), those earning just over £10,000 per annum (contributions relate only to income above the lower earnings limit) and those with several different jobs, who don’t hit the earnings level in any particular job.
The second issue relates to the self-employed. As recognised in previous government initiatives, and investigated at length in the Taylor review published in summer 2017, the economy is changing and the so-called ‘gig economy’ means that a vast number of employers employ people on a self-employed basis. None of these individuals are touched by auto enrolment, and their financial positions and needs are so diverse that it is difficult to legislate to assist or encourage savings by them.
The third issue is that people remain unengaged with their savings. In its own way, auto enrolment is a recognition that people do not engage with their savings very much and are generally apathetic on the subject. The idea behind auto enrolment is to capture individuals into savings by using their apathy to stop them opting out, rather than their apathy stopping them joining pension schemes in the first place. However, the review notes that the vast majority of individuals remain in the default pension fund that they initially enrolled into and do not engage with their pension at all.
What were the key proposals made as a result of the review?
There are policy proposals to deal with each of these issues. The first issue is being tackled not as expected by an increase in headline minimum rates (perhaps in the face of pressure from employer groups on which the burden of increases would fall) but by lowering the auto enrolment age to 18 and making contributions on the whole of income up to the upper earnings limit (that is, adding in the income from zero to the lower earnings limit). It is noted that this will affect employers and increase costs, so impact studies are proposed before anything is implemented.
In relation to the self-employed, the proposals are more vague, representing as it does a rather difficult question which the government is clearly finding it hard to answer. The proposal is to run a number of trials to implement some form of auto enrolment or access in certain areas, with a view to formulating a policy. Proposals include using national insurance contributions, allowing an opt in in tax returns, and relaxing the rules of the Lifetime ISA to encourage the self-employed.
In relation to the third issue, the proposals are mostly to encourage the use of the annual benefit statement and communications by employers to engage individuals, and to launch a new auto enrolment campaign. It is noted that the new single Financial Guidance Body will no doubt assist with engagement. However, the government is also moving forward with its Pensions Dashboard idea, the plan that all your pension benefits will be available to view on one page, which is presently awaiting the results of a feasibility study.
What are the next steps following the outcome of the review?
Much of what is proposed is already in the works. However, the trials for the self-employed are expected to go forward over the next year or two. The changes proposed on contributions, and possibly for the self-employed, will be implemented ‘in the mid-2020s’, with the cost implications being reviewed in advance. These changes will require primary legislation, and so no doubt are waiting for a period of time when the Brexit agenda no longer fills the Parliamentary calendar.
What are the practical implications of the proposals? How have they been received by the pensions industry?
Implementation of the proposed changes are quite a long way off, as described above so practical implications are in the future. The changes to increase contributions were expected and this has been welcomed by many as a way of focusing the impact on employees who need it most (that is, those with lower incomes). However, certain businesses, particularly the retail sector which employs a large number of young people, will find a significant impact which may, of course, lead to changes in the policy before implementation. In terms of the self-employed, the issue remains a significant one whilst the problems of the gig economy are explored. No one believes that a pensions solution will be different from any other solution, and it is to that change that everyone is looking.
The problem of pensions engagement and communication has been a traditional one for the industry. Increasingly, the argument that issues need to be made simpler and more appealing is seen as a weak one – over-simplification misleads people and some issues are, frankly, complicated and difficult, and it is not likely that any form of presentation will make them simple. The pensions dashboard would of course make the presentation of savings clearer, but despite generally being hailed as a good idea, there is a good deal of quiet cynicism in the industry as to whether it can work in practice, given the complexity of the technology required, and the communication and sharing of information needed by competitors. Many expect it never to survive the committees it has sat within for the last few years.
Rosalind Connor, Partner
This article was first published on Lexis¬ÆPSL Pensions on 2 May 2017. Click for a free trial of Lexis¬ÆPSL.
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