Why savers need an auto-enrolment reality check

In 2012, the Department for Work and Pensions' working paper no. 109, 'How can we incentivise pension saving? A behavioural perspective', set out to examine why people save and how they can be encouraged to save more.

Motivation, or lack of it, to provide financially for retirement is a complex issue, encompassing economic and behavioural theory, and good old-fashioned common sense. And it is difficult, if not impossible, to measure and predict.

Without any added value features, it is difficult to see how being placed in a vanilla scheme will be valued by staff 

Savings incentives have a symbiotic relationship with failing to save, insofar as the former would not exist without the latter.

It necessarily follows that the incentive to save into a pension scheme has to be sufficiently motivational, and the 'prize' on offer has to be sufficiently attractive to overcome the inertia surrounding long-term saving.

The working paper described the main savings incentives in practice as: tax relief, which may influence where someone saves, but not how much they save; financial education; and the availability of additional, tax-efficient savings products.

Only improved and increased financial education can tackle the fundamental problem of understanding whether it is in an individual's own interests to divert income from buying lottery tickets/putting a deposit on a house/reducing credit card borrowings – delete as applicable – and instead paying it into a pension scheme.

So instead we have compulsion: auto-enrolment for workers who are also 'eligible jobholders', ie most members of staff for most employers.

Auto-enrolment introduces the risk of levelling down the expectations of staff about pension provision from their employer. And compulsion by itself is not at all motivating and therefore not a savings incentive.

False hope on retention

Without any appreciable and appreciated added value features, it is difficult to see how being placed in a vanilla qualifying scheme will be valued by staff or potential recruits.

Further, the homogeneity of qualifying auto-enrolment schemes from the lay person's perspective makes them seem lacklustre – in particular when remaining final salary pensions are widely understood to be 'gold-plated'.

What we need is a reality check on what it costs now to produce an auto-enrolment-generated two-thirds final salary retirement income, and then a scaling up or down of savers' expectations in line with that reality check.

The potentially shocking end result will drive home the point that to get more you need to save more – a lot more.

This attitude needs to become a revised social norm, in comparison with the current social norm explained in the working paper of simply having a pension sufficing.

While it is clear that we need to become a nation of savers (in our own interests), and spenders (in the economy's interests), auto-enrolment does not resolve this tension in any way.

Possibly the most superficially appealing pensions announcement to come out of the Budget was the decision to legislate to allow those aged 55 and over to withdraw their defined contribution savings in one go, subject to tax, and to the scheme rules, so this will not necessarily result in uncontrolled access to the funds.

But it is difficult to understand how full access at minimum pension age will in practice encourage people to save more into a pension, in particular as the outgoing funds are taxed, bar the 25 per cent lump sum, whose tax-free status is under threat.

It could even be counterproductive if it sends the message that sufficient replacement retirement income will have been generated by the age of 55.

I refer back to the need for shock tactics. The provision of a qualifying auto-enrolment DC scheme may be simply an unavoidable pensions tax on employers that – except for low earners – has no features to attract or retain employees.

Anne-Marie Winton is a partner at law firm Nabarro