Back in the middle of last year, I wrote a blog called “The Acid Test Of Automatic Enrolment”. Broadly it was saying that the measure of success should not be the opt-out rates quoted by Government, but how many employees continue with their pension savings once the rises of April 2018 and 2019 come into force.
The argument behind this phased increase in contributions was that it would allow employees and employers time to get used to these extra costs. Not unreasonable, you may think.
The converse argument, however, is that employees have been fooled into thinking they are making pension provision because they are doing what the Government has said they should do, when, in actual fact, they have been doing the equivalent of repairing the hole in the side of the Titanic with a sticking plaster the size of a thumbnail.
Give it a bit of thought and what possible conclusion could be drawn other than that contributions of 1% of pensionable earnings each from employer and employee would be wholly inadequate in making a meaningful contribution to retirement income?
It has always been the case that Automatic Enrolment would only really work for those employees who spend almost all their working life at the highest contribution rates i.e. the 8% overall from April 2019. In other words, for those employees in their early 20s now.
Older workers will obviously get something but it is doubtful this will mean a decent standard of living in retirement. In fact, many will almost certainly make use of the Pension Freedoms of 2015 and take their pension fund as a lump sum as the income it will produce will be meaningless.
So, have we wasted the last 5 and a half years since Automatic Enrolment started? For those schemes that have chosen to do only what they had to, it’s hard not to say “Yes”. But, as we all know, we can’t turn the clock back so we have to live with what has gone.
There is a famous quote “Those who fail to learn from history are doomed to repeat it”. Should we be thinking about this following the Government’s review of Automatic Enrolment published in December last year?
The review has identified two areas where current rules are obviously inadequate and proposed changes. These are dropping the minimum age at which Automatic Enrolment applies from 22 to 18; and making employers and employees pay pension contributions on every pound of earnings (as opposed to the current situation where employers can mandate that their schemes ignore the first £490 of earning each month).
Both of these proposals will undoubtedly contribute to the overall aim of Automatic Enrolment – namely, ensuring workers reach retirement with adequate private funds to achieve a quality of life in retirement that will mean they are not looking to Government for additional support.
So, what are the next steps? Well, at the risk of repetition, Government don’t want to put these changes in place without a full assessment of the impact and they also want to make sure employers and employees get used to the idea. Estimated date of implementation – the mid 2020s. Is this another 7 years (or more) wasted?
It’s easy to sit on the sidelines and snipe at Government. So, let me make it clear that I think all Governments from 2008 should be applauded for conceiving, implementing, and continuing with relative continuity, Automatic Enrolment. It is immeasurably better than the pension policy of the previous 20 years and should, eventually, go a considerable way to solving our pensions crisis.
What frustrates me is that when a deficiency is identified, there is no bullet biting (or nettle grasping if you prefer) that says “Here’s a problem, let’s fix it now”. Lengthy consultation and indeterminate future implementation is just kidding ourselves.
Do we want to condemn our kids to the same problems we have faced or do we really want to do something about it?
Peter Murphy DipPFS