Auto-enrolment will fail unless it fosters a broader savings culture
by Dr. Ros Altmann
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WE ARE on the brink of a revolution in workplace pensions. From 1 October, new laws designed to address the dramatic decline in long-term saving will force all employers to provide pensions for their staff. Employers will automatically enrol them, and employees will have to opt out if they don’t want to contribute to pensions.
Initially, the policy will cover the largest firms. But, by 2018, every single employer must have a pension scheme. Even working mothers will have to provide pensions for their nannies. Eventually, at least 8 per cent of salary (4 per cent from employees, 3 per cent from the employer and 1 per cent from tax relief) will be put into a pension fund each month, unless the worker opts out.
It is certainly important to rebuild a retirement savings culture. Recent figures reveal that the number of workers in company pension schemes has plunged to an all-time low.
The government believes most workers will stay put after auto-enrolment, and that millions more will have private pensions in future. I would love to see such a bold reform succeed, especially as it is likely to cost employers huge amounts of time and money. But I fear that it fails to address some vital issues for reviving retirement savings.
The pensions crisis has been worsening for years. Confidence and trust in pensions has been battered, and many recent retirees have found that their pension savings failed to deliver the incomes they expected. Disappointing investment returns, excessive charges, plummeting annuity rates and several scandals have all taken their toll.
And, unfortunately, there are many low earners for whom pensions are not an appropriate savings product because the current state pension system penalises private pensions. The means-tested pension credit, to which nearly half of all pensioners are entitled, takes away much or all of many people’s pension income. This fundamental flaw in the UK pensions landscape must be fixed quickly, if auto-enrolment is not to end up as a massive pension misselling fiasco.
If automatically enrolled workers reach retirement, and find their private pension savings leave them no better off because of state pension rules, they will blame the government for wasting their savings. Without radical state pension reform, it is not safe to automatically enrol all low earners into a pension scheme, unless they are warned that they may be better off saving in a different form – like an Isa. But there are no plans to offer advice or risk warnings to low earners. And, if they were properly warned, they would likely decide to opt out, thereby undermining the policy’s objectives.
There is also a danger of people feeling a false sense of security that they are covered for later life, just because they are putting something into a pension. In fact, the minimum contributions required for auto-enrolment will nowhere near cover most people’s retirement needs.
Pensions and investments are complicated. Most people will need some help to choose their investments and monitor their fund over time, to see what income they may be on track for. How will they do this without advice?
Auto-enrolment may go some way to solving the pension crisis, but it is not the best approach. There is an important difference between encouraging people to save for retirement, and forcing them to contribute to pensions. A pension is just one financial product – and it is the most inflexible.
Many may be better off saving for a house, or repaying debts. But, if they choose to save for other purposes, they lose the employer contribution and tax relief.
Auto-enrolment could work much better by allowing more flexibility. Including Isas or student debt repayments as part of workplace saving, or by making pension funds partially accessible, we could help generate a more active savings culture. Of course, the pensions industry wants to earn fees on captive money that cannot be touched for decades. But kick-starting a broader savings culture among young people is just as important as encouraging pensions saving.
In uncertain financial times, it is not surprising that many workers are unhappy to put their money in a “locked box” that they cannot open for decades. As long as policymakers believe that it has to be pensions or nothing, when it comes to long-term saving, many people will be left with nothing.