As Pension Awareness Week unfolds, The Investing and Saving Alliance’s head of retirement, Renny Biggins, warns that schemes need to increase engagement with their members as delays to auto-enrolment changes are to be expected.
But it is important to emphasise ‘to date’. AE is still relatively immature, having only been in operation for less than a decade. Retirees for several years to come are more likely to have pension wealth comprising defined benefit and defined contribution schemes.
The difference in the pot sizes generated through AE is vast. The median combined DB and DC pension wealth for someone approaching retirement is £91,200. This is heavily skewed by DB, which has an isolated median of £181,000 compared with DC of £28,500.
We know the current level of 8 per cent of banded earnings is not sufficient in isolation to provide good retirement outcomes for median earning individuals and households – even if they have had good terms of AE membership throughout their working lives.
If government and industry work in a collaborative way, placing consumer outcomes at the centre, we stand a fighting chance of providing the support framework and choices a consumer needs to navigate through the conundrum that is retirement
Various life events typically arise that impact on the ability to save into a pension, such as taking time out to raise a family, unemployment, self-employment, moving to part-time work and full-time caring responsibilities.
Delays expected in AE changes
At Tisa, we would like to see the minimum contribution rate gradually increased to a 6 per cent matched basis over a period of six years. However, now is not the right time to make those changes.
The impact of the pandemic has had a profound impact on the finances of many households and employers. Furthermore, the recent national insurance contribution increase of 1.25 per cent for employees and employers is likely to result in any increases to minimum contribution rates not being introduced this decade.
This increase could also impact the timing of the proposals to remove the lower earnings limit and reduce the minimum age to 18. While this is due to be implemented at some point during the mid 2020s, there has been no rush to place these into legislation.
Where does that leave the average employee? They bear all the risks with their DC pension pots, often unknowingly, and there are numerous statistics to show that majority of individuals are completely unengaged with their pensions.
They also think that because they are auto-enrolled (often paying minimum contribution levels), their retirement is taken care of.
Turn up the dial on engagement
Given the unlikelihood of any significant change in contribution levels, the answer can only be engagement.
If there is one sentence which sums up Pension Awareness Week appropriately, it is ‘we cannot allow people to sleepwalk into and through retirement’.
One reason for disengagement often quoted is that pensions are too complicated, and the rules keep changing. This is true when you consider the scale of change the industry has undergone this millennium.
Even in the past year we have experienced siloed regulatory change of almost unprecedented levels. If the proposals are all approved, we could see consumers having to navigate through a whole series of requirements in order to access their money.
Consumer outcomes should always be placed at the heart of any changes, with a joined-up approach taken by regulators to ensure all scheme members experience the same outcomes, have the same protections and are given the same opportunities.
At the end of the day, irrespective of whether they are in a workplace scheme regulated by the Financial Conduct Authority or the Pensions Regulator, their needs will be the same.
Consumers also need guidance much earlier in the retirement journey. The earlier they start saving, the more their money will work for them and the less they will need to save each month, and, of course, the reverse also applies.
For many, realisation of a pension shortfall comes too late to be able to significantly change outcomes. However, if that guidance at earlier ages were available, we still need individuals to use it.
The saying ‘you can lead a horse to water but cannot make it drink’ is perfect for this scenario. If government and industry work in a collaborative way, placing consumer outcomes at the centre, we stand a fighting chance of providing the support framework and choices a consumer needs to navigate through the conundrum that is retirement.
Renny Biggins is head of retirement at The Investing and Saving Alliance
