Data released by the Office for National Statistics (the UK’s largest independent producer of official statistics) this week has shown the success of Workplace Pension Reform measures – that’s Automatic Enrolment to you and me. I use the word “success” in a very limited sense, the reasons for which will become clear later.
The good news is that employee participation in workplace pensions now stands at 73%. That is to say, nearly three quarters of all employees are now contributing to a pension. The comparative figure in 2012 was 47%.
The ONS data also shows that the young and the low paid are now in pension schemes in greater numbers than ever before. 63% of workers over 22 and under 30 are now in a pension, compared to a lowly 16% in 2012.
Being in a pension scheme is, undoubtedly, one of the aims of the Government, but for this whole exercise to work properly i.e. to ensure people have a financially secure retirement that does not require a substantial reliance on Government money, more needs to be done.
10 million people have been put in pension schemes since Automatic Enrolment began back in October 2012. It is likely that the vast majority of these have been enrolled on the basis of minimum contributions. Until April this year, that was 2% of pensionable earnings. That has risen to 5% this month and will increase further to 8% in April 2019.
Employers who have been dragged into pension provision as a result of Automatic Enrolment have, by and large, done what they had to and no more. And the anecdotal evidence is that they will continue to do only the statutory minimum.
This means that the full effect of the changes is only really going to come through in the 2060s onwards when today’s 20 year olds reach retirement having had contributions of 8% of earnings over the whole of their lifetime. The rest of us will have built up some level of pension savings but probably not enough to make us “financially secure”. And today’s 40 and 50 year old will probably only have enough to give them a couple of decent holidays before they fall back onto their previous provision which, for many, will be the State Pension only.
Those in the know suggest that the overall contribution level should be at least 12% to ensure we achieve this mythical “financially secure” state. But the Government have no plans to increase contribution levels above the 8% we will see introduced in 2019.
Here the success of Automatic Enrolment ends for now. More people are saving… but they are not saving anything like enough.
In the words of Steve Webb, former Pensions Minister, “… the champagne needs to be put on ice”.
So, what needs to happen now? The obvious answer is that overall contribution levels need to be increased further. But how can this be achieved?
Increasing the employer rate will be seen by many companies as a step too far, if it is done in isolation. And many employees will simply stop contributing if there are further increases in employee contribution rates, making any change in this area self-defeating.
What is needed is education. A co-ordinated message across both the pensions industry and Government, that more needs to be saved to give people the retirement they would like for themselves. Without this balance, it seems likely that people will pay no more than lip service to messages that appear, for example, to only represent what they see as the vested interest of pension companies to get yet more of their hard-earned money for no apparently good reason.
The Pensions Dashboard – when it is finally introduced – may help. This is intended to be an online service people can go to and see their overall pension entitlement from all sources, including the State Pension, without them having to collate the details themselves. However, it is already way behind its original schedule and continues to be beset by issues around data compatibility so it is still some way off yet.
Until Government gets its act into gear, and with Brexit as a much more pressing problem, that is not likely to be for a few years yet, it seems that, once again, the burden will fall on employers to educate their workers on the merits of pension saving.
And many of those same employers will be, at best, guarded in their approach, fearful of overstepping the line from disseminating factual information to giving advice.
How best to communicate with employees effectively and with risks minimised? Agree with a company like us on a communications strategy for the long term that will make pensions relevant to staff; look at realistic outcomes based on varying contribution levels; explain retirement options; and, overall, bring pensions to the forefront of peoples’ minds when they have the chance to do something meaningful.
Peter Murphy Dip PFS
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