Pensions adequacy: Why this broken record keeps spinning

It almost feels like a cliché to start an article on pension saving by saying that automatic enrolment has been a tremendous success but now participation has been largely addressed, we need to solve the adequacy crisis. That doesn’t mean this message is any less important or urgent, however.

So far this year we have been busy diving into policy debates on the Value for Money Framework, the small pots solution, decumulation options and the Advice Guidance Boundary Review.

It is right that we focus on these issues but now that all those policies are in train, we need to come back to adequacy.

For all the talk of lifetime providers and greater investment in UK companies, the glaring hole in the Budget to me was the lack of any further thinking on how to get from today’s insufficient minimum pension contributions to a place where more people are saving enough by default.

Even the long-awaited consultation on delivering the 2017 auto-enrolment review recommendations was absent, despite the necessary powers having been in place for six months.

Raising contributions

It’s not possible to get to Australian levels of contributions (12% mandatory employer minimum from next year) overnight, given the current economic situation. However, this only means that a credible long-term commitment is more desperately needed so that employers and employees can factor the future rises in over multiple years.

Of course, there is never going to be an opportune time for a chancellor to put up the contribution minimums. It’s not exactly an election-winning strategy to commit to a change that will likely result in workers having less take-home pay, even if they may end up richer in the long term.

Recent work by Phoenix Group and WPI Economics on the economic triggers that should decide when auto-enrolment minimums go up is particularly welcome for this reason.

The key to auto-enrolment’s success has always been maintaining political neutrality and cross-party support. It is therefore in everyone’s interest to free the hand of the next chancellor to deliver this momentous change to secure our futures.

Reaching 12%

So where do contribution levels need to get to and by when?

At the Association of British Insurers, we are clear that minimum total contributions need to reach 12% for most people in the next decade. This should be achieved by rebalancing contributions so that both employers and employees pay in 6% of an individual’s salary.

Research by Royal London and Oxford Economics shows how moving to 12% would result in an additional annual pension contribution of close to £1,000 for an average employee. The extra funds being contributed will not only begin to solve the adequacy crisis but will also help with government priorities like investing more in the UK, engagement, small pots and value for money.

Without reallocating funds to UK assets, investing the existing proportion of a bigger pie will help to bring increased homegrown opportunities. Furthermore, we expect savers to take more notice of their pension pots as values grow faster and climb to larger totals.

Additionally, with more money going into pension savings, there will be fewer small pots as workers will not have to be in a job for as long to build up a more substantial pot. The influx of larger contributions will in turn help providers that have large numbers of small pots as more of these will surpass the break-even point, below which they operate at a loss.

Of course, there are some warnings that increasing contributions might not work well for everyone. Specifically, we need to think carefully about how reforming auto-enrolment can be made to work for people with low financial resilience, as well as addressing affordability for younger people. It is well known that the lack of pension contributions due to career breaks, tend to have a much greater impact on women.

Auto-enrolment 2.0

It is important that, as an industry, we are vocal on the need to think about how the next phase of auto-enrolment can integrate a liquid savings element, the flexibility to ‘opt down’ to lower contributions as well as opting out, and focus on a more equitable mechanism for retirement saving among parents and carers.

Furthermore, there is the opportunity to look again at how contribution increases could be set around life events linked to age and home-buying or pay increases.

The much-needed debate about this flexibility will hopefully address the findings in a recent report from Phoenix and Nest Insight, which found that priorities change over an individual’s lifetime and any metric of retirement savings adequacy will need to be adjusted to take account of the more significant changes.

We may be in the midst of an election year, but clearly the need to solve the savings adequacy crisis is only becoming more acute as more of us edge towards retirement without any defined benefit provision and are more reliant on what auto-enrolment minimum contributions can buy us.

With real concrete steps yet to be put in place, we will all have to get used to hearing the cliché that it’s time for auto-enrolment 2.0 to solve the savings adequacy crisis. Until then, this broken record will keep on playing.

Ben Infield is long-term savings policy adviser at the Association of British Insurers.