Consumers will not have enough money to benefit from the opportunities the pension freedoms present, a report has warned, and any success will hinge on auto-enrolment becoming more prescriptive.
Auto-enrolment has largely been hailed as a success so far, reversing the trend of declining participation in workplace schemes. But fears remain over compliance among small and micro employers, as well as whether participation levels will persist when statutory minimum contribution levels go up.
Pension freedom will only be a success if people have something they can decumulate
Andy Masters, KPMG
The report published this week, entitled ‘Paradise postponed: long-term impacts of the pension freedoms’, was produced by consultancy KPMG and supported by the Association of British Insurers.
One of the key points outlined is that savers need a large pot in order to enjoy the benefits of freedom. It says: “Ultimately, the success of [pension freedom] is dependent upon the success of [auto-enrolment]. This is one piece of long-term policy where momentum must be sustained if retirees are to have sufficient money at retirement to benefit from freedom and choice.
“For this to happen, AE must become more prescriptive and the tax-based incentive more effective.”
Partner at consultancy KPMG Andy Masters, who worked on the report, said: “Pension freedom will only be a success if people have something they can decumulate… For the freedoms to be a success you have to solve the savings gap.”
Masters said that in a straw poll at a recent event hosted by KPMG, the majority of delegates voted that the responsibility of addressing the savings gap lay with the individual (see graph).
Source: KPMG
Compulsion to save
One way to increase saving would be through compulsion for auto-enrolment. Masters said if opt-outs increase as a result of auto-escalation, new measures may have to be considered.
Jonathan Reynolds, client director at professional trustee company Capital Cranfield, said raising contributions was the main thing that could be done to ensure adequacy at retirement.
“Contributions is the key issue,” he said. “There’s no magic with defined benefit – the reason they give you good benefits is good levels of contribution.”
Freedom to choose
However Phil Duly, associate at consultancy Barnett Waddingham, said compulsion was unlikely to be introduced for auto-enrolment.
The whole notion of pension freedom is actually giving the population the freedom to make the right decision. A compulsion to save in the first place goes against that
Phil Duly, Barnett Waddingham
“The whole notion of pension freedom is actually giving the population the freedom to make the right decision. A compulsion to save in the first place goes against that. I can’t see that happening, I think it would be good but I can’t see it happening.”
One potential challenge for the industry is the difference in strategy applied to the two ends of a saver’s working life. Auto-enrolment relies on nudge principles, or inertia, to get people saving into a pension, whereas their income in retirement relies on their being engaged and informed.
The report adds: “So long as the world remains politically and economically volatile we should not expect greater stability from policymakers or more joined-up long-term thinking to take precedence over shorter-term expediency.”
