Government disappoints in auto-enrolment inquiry responses

It is a disappointing set of responses and tells us a lot about its approach to pensions policy.

For all the success auto-enrolment has delivered in vastly increasing pension membership, it continues to fall well short in ensuring people have enough in their pensions to live on comfortably in retirement.

The auto-enrolment project was set up to provide a basic pension to top up state pension. However, many savers will be immensely disappointed come retirement, if they arrive at that point with the expectation that their involvement in a workplace scheme will reward them with a good income.

I believe the government should be honest and tell people that minimum contribution rates are unlikely to result in a retirement that is financially comfortable, if a pension is all they have

Even the government itself admits that “current statutory contributions of 8 per cent on a band of earnings are unlikely to give all individuals the retirement to which they aspire”.

The continued delay in clarifying the improvements to the participation rates (reducing the age of access) and the contribution rates (increasing the earnings and percentage that apply) is therefore deeply unsatisfactory.

Government can do more

We have to accept the current economic backdrop is not necessarily the right time to increase demands on people or employers.

But the government could be doing a lot more to advise people that the limits it sets are not necessarily sufficient. This will depend on individual circumstances, but is something that is generally poorly understood among the general public.

The time for backslapping on the success of auto-enrolment and tiptoeing around inadequate contribution rates must now end, 11 years on from its launch.

Instead, the government is putting a lot of reliance on simpler benefit statements, pensions dashboards, and some nudges to guidance to educate individuals. This quite simply is not going to be enough.

Committee chair Stephen Timms was especially strong on this point when he said: “The government is tinkering around the edges and relying on nudging people towards engaging with pensions rather than tackling the problem of under-saving head on.

“This approach, as we heard many times during our inquiry, is unlikely to be enough.

“It now must get on with building a consensus on the need for change and draw up a plan for introducing higher minimum contributions to workplace pensions in the future.”

More support needed for low-income earners

To be clear, and slightly more sober for a second, many lower-income earners could build pots of, say, £150,000 through a lifetime of auto-enrolment, supplemented by at least £10,000 of state pension.

But this is only likely to generate an income of around £13,000 a year — some way short of what most people would consider needed to be financially comfortable in retirement, and just a spot above the Pensions and Lifetime Savings Association’s minimum income standard.

What are the choices for that person? Keep working? Start scrimping?

What about the “wrong” kind of low-income workers? Those with multiple jobs, just below the trigger levels or in the wrong kind of scheme. What outcome will they have?

I believe the government should be honest and tell people that minimum contribution rates are unlikely to result in a retirement that is financially comfortable, if a pension is all they have.  

Maybe this outcome will become clearer via dashboards and simpler statements, and this could trigger people to pay in more — or even put pressure on their employer to pay more.

But it is possible, in my opinion, that these individuals will decide to give up pension savings altogether and do something else with their money.

And for all of the “success” of auto-enrolment, it will not solve the issues it was set up to eradicate: providing a sufficient income for the lowest earners in their retirement.

David Brooks is head of policy at Broadstone