Eight in 10 employers are failing to incentivise good levels of pension saving, according to a survey, as the pressure builds on companies to improve their benefits packages.
Analysis of 300 employers by platform provider Hargreaves Lansdown showed average total contributions of 6 per cent for workers currently being enrolled, with average employee contributions at 1 per cent.
It is the latest in a string of studies revealing undersaving among defined contribution-reliant employees. However, experts remain relatively upbeat about the success of auto-enrolment, and said there was not yet evidence of employers “levelling down” contributions to meet the statutory minimums.
The study classed good pensions saving as 15 per cent combined contributions or better. “Incentivising” was any combination of contributions offered by the employer that could lead to that level of saving.
Working longer is one very likely possibility for these people
Tim Gosling, Pensions and Lifetime Savings Association
Just 21 per cent of respondents to the survey demonstrated that they offered such incentive structures, although the criteria did exclude otherwise generous arrangements, such as non-contributory schemes that offer, for example, a 12 per cent employer contribution.
Nathan Long, senior pensions analyst at Hargreaves Lansdown, expected the currently unsatisfactory situation to improve in coming years due to the impact of increases in the minimum contributions prescribed under auto-enrolment.
Auto-enrolment contribution hikes will take effect in April 2018 and 2019, and even then will only amount to a total minimum contribution of 8 per cent of pensionable earnings.
However, Long said those companies, for which benefit packages are a significant part of their recruitment strategy, will be forced to raise their game as the pack catches up.
“If everyone else is dragged up to a similar position as yourself... all of your advantage is taken away by legislation,” he explained.
Don't panic yet
Successive studies have borne out the conclusion that current average savings levels are too low, but may not accurately reflect the impact of pensions policy.
“I don’t think we should take too much from the level of DC contributions at the moment,” said Daniela Silcock, head of policy research at the Pensions Policy Institute.
Silcock explained that the surge of 7m people into the DC system under auto-enrolment had brought the average level of contributions down considerably, but that this was evidently a better situation than previously.
Concerns have been raised that employers might view minimum contributions as a benchmark, and might not increase or even scale back their provision.
However, Silcock said this phenomenon had so far not presented itself. “From what I can tell, the majority of employers... haven’t levelled down or reduced their contributions,” she said.
Complicating the picture of intergenerational fairness, which is often posited in the pensions sector, she also said sponsors of closed DB schemes were more likely to offer generous DC contributions.
The Hargreaves Lansdown survey did not take account of whether employers were also sponsors of DB pension schemes.
Solutions anyone?
Improving adequacy is still a priority for all involved in pensions policy though. Crucially, this year’s review of AE, led by the Department for Work and Pensions, will not focus on the issue, with coverage dominating its scope.
2017 AE review will ignore adequacy but include charge cap
The DWP has announced the scope of its 2017 review of AE, including a reconsideration of the charge cap on DC default funds
“There are trade-offs between doing it fast and doing it well,” said Tim Gosling, DC policy lead at the Pensions and Lifetime Savings Association.
The PLSA recommended legislating for an increase in contributions to 12 per cent in a report last year, although Gosling admitted that targeting implementation by the end of the next parliament would now be a significantly harder task.
For those members of Generation X who do not see increases happen in time to reach their target replacement rates, Gosling foresaw several potential effects.
“Working longer is one very likely possibility for these people. Obviously that may not be popular, but we are where we are,” he said.
Gosling said it was difficult to see what impact that would have on the labour market, and that take-up of ideas such as equity release would also decide what proportion of Generation X do work for longer.
“There are strong behavioural issues with downsizing; with equity release. It remains to be seen whether people will do the economically rational thing, or whether emotional attachment to a property, where you’ve lived for a long time, overrides the economic imperative,” he said.
