How driving auto enrolment into next gear may benefit employees
Dale Critchley celebrates the tenth anniversary of auto enrolment and explores the changes that could help make the next ten years a race to the finish line for employee retirement.
Shift back in time to 2012 when the UK hosted the Olympic games, the Queen celebrated her Diamond Jubilee, and Prime Minister David Cameron left his eight-year-old daughter in a pub.
Seems like a lifetime ago. It was also the year that automatic enrolment was introduced. And, for the most part, auto enrolment seems like a resounding success. Pushed forward by a parliament that recognised the value of long-term pension planning, and in the middle of the 2008 financial crisis, the Pensions Act brought about auto enrolment.
Four years later, the first employees were automatically enrolled into saving for retirement.
Changing the pensions landscape
Over the past ten years, we’ve seen a transformation in participation in workplace pension schemes. Together with the government, employers, employees, providers, trustees, advisors and (who can forget) Workie, millions of workers became retirement savers. Footnote 1
And the look and feel of their pension pots changed too. Alongside independent government committees, pension providers, advisers, administrators, and trustees worked to take the foot off the pedal on costs and shift gears on service. This meant making the charge cap nearly irrelevant and growing digital services that were merely an idea a decade ago.
However, auto enrolment isn’t across the finish line, yet. The next ten years will need as much stamina and determination to deliver its full potential.
The most pressing challenge is making auto enrolment adequate for employees’ needs. As many employees are saving at a minimum rate, it could be too low to provide them with the retirement income they may be expecting. With the focus on reducing charges coming at the expense of potential returns, and too few employees accessing advice or guidance services to make the most of their savings, the next ten years of auto enrolment needs a gear shift.
Changing gears and driving auto enrolment to the finish line
Ten years ago, the long lead time helped make auto enrolment a success. Hanging back in the pit not only gave the government time to work on regulations, but it also gave stakeholders time to plan. We should have a similar plan for what auto enrolment will look like in 2032. And the pit crew should consider:
- removing the lower qualifying earnings threshold (LET) to level up contributions for lower-paid and part-time workers.
- making auto enrolment accessible from 18 years old, which will give employees more time to grow their pension pot.
- increasing minimum contributions to a level that can deliver a living pension in retirement.
To help draw the roadmap for auto enrolment’s future success, a fundamental shift in perspective should centre on:
- legislators and regulators working with people from both the supply and demand side of the industry to refocus workplace pensions on outcomes and value, rather than on charges.
- pension providers working with advisers to recognise that, although new solutions may have higher costs, they may also attract clients if they show better value.
- helping employers and employees become more comfortable with uncertainty.
Investment in private equity and debt, or in infrastructure, may guarantee a higher charge with only the promise of better returns. The challenge for advisers, their corporate clients and trustees is to recognise when that contract offers better value for money.
But, none of this really makes a difference if people make the wrong decisions in retirement. Pension freedoms legislation, introduced in 2015, give employees a chance to create a flexible income stream that reflects the transition into a new life stage – as opposed to a ‘cliff edge’ retirement.
Since the legislation also created the risk of tax advantages being wiped out or income drying up later in life through ill informed decision, we must mitigate those risks. The next ten years will see Defined Contributions (DC) pension pots far bigger than they are now, making up a larger percentage of pension income, and providers can help reduce some of the risks through packaged retirement income solutions.
But to help bring the best outcomes, employees should have advice and guidance based on their personal circumstances and they may need to be persuaded on the value of the advice. This means that the advice industry will need to evolve, based on regulation, to provide advice in a way that meets consumer needs and at cost they’re willing to pay.
The first ten years of automatic enrolment saw many workers zooming into building their retirement savings. Looking down the road to 2032, the challenge for the government and industry is to find another gear to push on – to make sure those savings turn into adequate incomes to sustain them for the whole of their journey through later life.
Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.