Industry split on auto-enrolment reform timetable

Giving evidence to the Work and Pensions Committee on March 23, Sue Ferns, senior deputy general secretary at Prospect Union, said she supports the proposals to increase minimum contribution rates to combat the problem of “inadequate pension savings”.

Currently, the minimum auto-enrolment contribution to an employee’s pension savings is 8 per cent of qualifying earnings — of which employers must pay at least 3 per cent and the employee the remaining 5 per cent.

“[A contribution rate of 12 per cent] is really the minimum level [to save] for an adequate income in retirement,” Ferns said, adding that she would like to see a 2:1 ratio between employers’ and employees’ contributions.

“This is the only way to get to 15 per cent,” she said.

“I accept there will be different views on that, but we have to address this problem of people not having adequate pensions.”

Sophia Dimitriadis, senior economist at the International Longevity Centre, agreed, saying minimum contribution rates need to change this decade because there is “such an urgent need”.

Nigel Stanley, chair of Nest’s members’ panel, said he did not want to argue against a rapid timetable since he is in favour of it, but admitted the difficulty was getting the political buy-in for it to be a priority.

“You need to build a consensus among politicians, employers and workers, consumers, infrastructure to deal with it,” he said, which can be difficult when there are other things to focus on that are less reliant on consensus.

“This is a big change in the pensions system, but better to start doing it slowly than putting it off because it’s too difficult.”

However, Christopher Brooks, head of policy at Age UK, said he doubts a consensus can be achieved this decade as it would be really difficult to get employers to accept it.

He said he accepts there is never a good time to do it, but clarity is essential.

“It takes time to build a consensus to make that a reality, that’s why we need a timetable, we need a clear vision of what the government wants to achieve and a timetable for achieving it,” Brooks said.

Ferns added: “This may be ambitious but we need to do this, we need to deliver those results otherwise we will continue to have the problem of inadequate pension savings for generations to come.”

Do we need a new Pensions Commission?

In a follow-up hearing with the Work and Pensions Committee, experts were asked whether a new Pensions Commission is required.

The previous Pensions Commission was set up by the government in 2002 to investigate the private pensions landscape. It reported its findings in 2004 and 2005.

The government subsequently brought forward two pensions acts in 2007 and 2008. The latter, which targeted private pensions, introduced an obligation for employers to automatically enrol their employees into workplace pensions, which came into force in 2012.

Laurie Edmans, a member of the Financial Inclusion Commission, endorsed the idea of another review “as detailed and as forensic as the Pensions Commission”. 

“I don’t believe that inertia is, any more, enough,” he said.

“I think that the overall picture shows serious disparities between the pensions expectations of many people, which have not received sufficient attention, and those disparities that are aligned with the nature of people’s employment.

“There is a paradox. Expectations seem to be rising as the overall level of pensions provision falls.”

Conservative MP Nigel Mills, who sits on the committee, questioned if a new commission is needed so that the government can “make a decision on contribution rates and just decide when we’re going to hit 12 per cent and what the split is”.

“Yes, is the short answer,” replied LCP partner Steven Taylor. “Certainly, the jump to 10 per cent is evidence people just don’t opt out, so yes, you can achieve the objectives by just ramping up the contribution rates.

“The question is, is that the desirable thing to do across society? If you want to get to 12 per cent, to 14 per cent, to 16 per cent, at what point do people actually start opting out, because we can’t take that for granted.”

This article originally appeared on FTAdviser.com