Master trusts call for AE rate increase with opting down option

The suggestion was made by spokespersons from Smart Pension and Nest on April 27 at a hearing in parliament with the Work and Pensions Committee, which is now in its third stage inquiry into pension freedoms and saving for later life.

Darren Philp, director of policy and market engagement at Smart Pension, told the MPs that while there is broad consensus that the minimum auto-enrolment rate should be increased from the current 8 per cent, this move spurs a debate “about whether people are over-saving” if the threshold is increased.

He said: “What I would like to see in the future is consideration, not just over increasing contributions to 12 per cent, but also allowing people to opt down.”

If you don’t want to save 5 per cent, you give up the right to an employer contribution at all. And for that reason, some level of capacity to opt down if default rates are going to go up might well be advantageous

Will Sandbrook, Nest

He explained that individuals for whom 12 per cent of minimum contributions “might be too much, it’s not an all or nothing [decision]” as they could be able to opt down to current levels.

“By considering things like that, we can change default behaviour and build on the success of auto-enrolment, but we are making it easier for people to make sure they can afford to stay in, which I think is really important,” he noted.

Will Sandbrook, managing director for strategy, analytics and Nest Insight at Nest, noted that the findings of the Pensions Commission in 2004-05, which originated auto-enrolment and the goal of 8 per cent of minimum contributions, looked at parameters for medium earners.

“I do think that it is really important that we also consider the people that are not medium earners, [for] whom in some cases […] 12 per cent is quite likely to be too much,” he said.

“As we think how to build on auto-enrolment, making sure that we do that in a way that is going to work for people in different levels or earnings is really important.”

Sandbrook noted that the current system is “very binary”.

“If you don’t want to save 5 per cent, you give up the right to an employer contribution at all. And for that reason, some level of capacity to opt down if default rates are going to go up might well be advantageous,” he added.

However, he recognised that there are significant operational issues in implementing such a system, highlighted by Philip Brown, director of policy at B&CE, the provider of The People’s Pension.

Brown told the committee that there are “serious design considerations” required to introduce this option.

“If you allow a step down in contributions, which for some will be appropriate, you need to work out if that step down is [being made by] the individual, the individual and the employer, and how it works at a practical level,” he said.

Brown also noted that attention should be paid to considering a mechanism to allow savers to “step back up when they feel it is appropriate to do so”.

“There’s quite a bit of work in the intricacies of a step-down process,” he stressed.

Philp noted that re-enrolment, which happens every three years if a member opts out of saving into a pension scheme, could be used to that effect.

Work on AE reforms is ‘running late’

Currently, auto-enrolment rules dictate that employers must enrol into a pension scheme any staff aged between 22 up to the state pension age, and earn more than £10,000 a year. There is also a £6,240 lower earnings limit, which is the threshold that allows employees to qualify for certain state benefits, including the basic state pension.

In its 2017 auto-enrolment review, the Department for Work and Pensions proposed auto-enrolling workers from the age of 18 and abolishing the low-earnings threshold, with these changes to be implemented by the mid-2020s.

However, as members of the Work and Pensions Committee pointed out, the government has not started its work on implementing these reforms.

In a follow-up hearing with the committee, Jamie Jenkins, director of policy and external affairs at Royal London — and one of the authors of the DWP’s 2017 report — noted that the two recommendations “are key” and there is “absolute consensus” about the proposed timeline.

“What we lack at the moment is a plan which we can put in front of employers and employees and say, ‘this is what is happening’,” he said.

“We need to do that, because we can’t do that one year before we make the change; we need two, three, four years before, so we are already running slightly late on that timetable.”

Questioned by MPs on which of the proposals is more urgent, Jenkins pointed out the removal of the lower earnings limit, “particularly because this is not something employees can by their own behest overcome, it’s in the rules”.

“There are people in lower earnings, particularly women, who are affected by that, whereas 18 year olds can start saving on an opt-in basis,” he added.

Philp noted that the pensions industry keeps calling “for the government to bring forward proposals” on these reforms.

“My fear, and I speak from experience on this, is that there is a wider question which is probably getting in the way of this consultation, which is the potential costs to the exchequer,” said Philp, who worked in HM Treasury between 1997 and 2010.

“Because if you expand coverage, if you get people saving more, that has obvious implications for tax relief. So I can imagine interesting discussions are going on within government as to potential timings on some of this as well.”

Industry split on removing £10,000 earnings trigger

At present, only individuals earning more than £10,000 can be auto-enrolled by their employers into a pension scheme, which some experts, such as Joanne Segars, chair of the board of trustees at Now Pensions, are keen to see abolished.

She told the committee that 3mn people are locked out of auto-enrolment, with women making up the majority of this group, “mostly because they don’t hit that £10,000 earnings cap”.

However, not all pension specialists agree on this matter. Sandbrook noted that the threshold was put in place “not to exclude people from pension saving”, but to “try and draw a line” on what is the balance of risk needed to make sure people “can benefit from the strong nudge that auto-enrolment represents”.

He said: “It would be very beneficial breaking down the population of people who don’t have a single income source which is above £10,000 and understand the broader situation those people are in.

“Some will be in a household where the overall income may be much higher, some — but I think not many — will have multiple jobs that aggregate to over £10,000 but where none of the individual jobs is above £10,000, but some will just be systematically on a low level of earnings.”

Sandbrook noted that there needs to be an understanding if “bringing those people in on the AE nudge model is the right move, or should we do more to try to encourage people in that group to self-identify to opt in to pension savings if that is suitable to their circumstances”.

Jenkins also shares this opinion, defending the retention of this threshold.

“It does protect the very lowest paid from being opted into a pension scheme when perhaps their priorities are different, and perhaps the state pension may well be their best form of replacement income in retirement,” he said.

“That trigger is a very important function of auto-enrolment to ensure that it is broadly hitting the right people.”