The Conservative party is “terrified” to make changes that will safeguard pensions adequacy and enable older savers to leave work when they want, former pensions minister Sir Steve Webb has said.
The director of policy for provider Royal London expressed frustration at the scope of the 2017 automatic enrolment review, saying that stepping up contribution rates should have been on the minds of policymakers 10 years ago.
The opt-out rates will increase, but they’re nowhere near the level that the industry thought they might be at the moment
Mark Futcher, Barnett Waddingham
Theresa May’s decision to call a snap election on June 8 has delayed the progress of the review, and a new government could in theory redefine the issues it will consider.
But Webb said it was unlikely that a Conservative government would ever make such a change.
“The problem we’ve got I think is their willingness to say to employers, ‘You’ve got to pay more in’,” he told an audience at the Pensions Management Institute trustee seminar on Tuesday.
As part of the coalition government, Webb said he had tried to persuade the Conservatives to plan further increases past current levels, but that they were “just terrified” of the reaction from businesses.
However, he said he was pleased that the current review would consider the role of the qualifying earnings bracket.
Why adequacy is essential
Webb’s work with Royal London has made a strong case for tackling pensions adequacy.
In 2016 his paper on ‘The death of retirement’ showed that an average earner saving at the auto-enrolment minimum would have to work until 77 to achieve 67 per cent of their pre-retirement income, with inflation-linking and survivor benefits.
In a subsequent paper released earlier this year, this estimate was revised up to 85 for a worker who drew the state pension as soon as possible and continued to work part-time.
To increase average contribution rates without risking widespread opt-outs, Webb called for greater use of behavioural economics by both employers and government.
Generous employers could default scheme members to maximum matching contributions, while policy could introduce auto-escalation, where employees pay more as their salary rises.
Action needs to be taken – now
Given the current framework was born out of the Turner Commission, which began in 2002, Webb said there was “a real danger we’ll get stuck” without immediate legislative action.
“Unless we get planning now... we could be well into the late 2020s before we get [away from] 8 per cent,” he said.
Research undertaken by the Pensions and Lifetime Savings Association has shown that even drastic measures such as removing the qualifying earnings bracket, increasing contributions to 12 per cent of earnings, and increasing the state pension age by five years, will have little impact on the retirement income of Generation X members.
Industry commentators rallied behind Webb’s comments on Tuesday, saying now is the time for a new government to take action.
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“We were equally as surprised when [the government] said the automatic enrolment review will not address the adequacy issue,” said Mark Futcher, head of DC at consultancy Barnett Waddingham.
He argued that minimum contributions should be raised despite consequences for opt-out rates.
“The opt-out rates will increase, but they’re nowhere near the level that the industry thought they might be at the moment,” he said.
Government message is unclear
Tim Middleton, technical consultant at the PMI, agreed, arguing that government policy on saving would need to be coherent and well communicated.
“In particular the [lifetime Isa has] the potential of acting as a siren voice to a lot of younger members, persuading them possibly to opt out of pension saving,” he said. “Things like that demonstrate that there is a lack of consistency in government policy and it really needs to be ironed out.”
He argued that removing the qualifying earnings bracket, which will be considered by the review, would be a useful step, and urged the industry not to rest on its laurels.
“There’s a degree of complacency, certainly within the general public but also within the industry, thinking we’ve made the start we needed to make and things will just fall into place,” he said.
