The real tests of auto-enrolment are still to come, one of the architects of the initiative has warned, as an adequacy report found many defined contribution-reliant members of Generation X are already beyond auto-enrolment’s help.
The policy, which was orchestrated by crossbench peer Adair Turner and the Pensions Commission, has been widely praised since its inception and has now enrolled some 6.8m members.
But a report by the Pensions and Lifetime Savings Association into retirement income adequacy has shown that an estimated 13.6m individuals have a less than 40 per cent chance of reaching their target replacement rate.
When examining representative individuals with only workplace DC pots, 97 per cent of savers fell into that category at the planned combined contribution rates of 8 per cent.
There’s not a lot you can do to make up for decades of poor access and decades of underprovision
Graham Vidler, PLSA
The results highlight the pressing need for escalation of contributions, which some fear may see a spike in opt-out rates from the current low levels.
“The next three years, as we step up to three plus five, is going to be the test point,” said Turner, adding that the stress-testing will be intensified by “what are very problematic economic times”.
The former chair of the Financial Services Authority said that issues around coverage and consolidation of pots would also need to be addressed by policymakers.
Auto-enrolment alone will not be able to solve the savings crisis. “We need broadly the principle that we set out in the Pensions Commision, that we keep increasing the pension age,” said Turner, arguing that this would keep the lengths of working and retired life proportional.
Too late for Gen X?
Working for longer may be the only option for many members of Generation X, identified by the PLSA as being stranded between the death of defined benefit and the introduction of auto-enrolment.
Challenging the traditional narrative of intergenerational unfairness in pensions, the study projected that raising combined contributions to 14 per cent and removing the qualifying earnings bracket would almost eliminate millennial savers in the worst category.
But the same move would still leave more than 90 per cent of Gen-Xers with a less than 40 per cent chance of reaching their target replacement rate.
“There’s not a lot you can do to make up for decades of poor access and decades of underprovision,” said Graham Vidler, director of external affairs at the PLSA.
Return of the commission
While the evidence base available to the Department for Work and Pensions is increasing daily, it remains difficult to predict the exact impact of scaling up contributions, which was shown to be vital to the success of auto-enrolment.
Combined contributions remain at their starting level of 2 per cent, making it difficult for the government’s scheduled 2017 review of auto-enrolment, which is required by law, to enact radical change.
As a solution, the PLSA proposed that pensions minister Richard Harrington use the review to set up a new Pensions Commission, which would make recommendations to legislators as sufficient evidence arises.
Richard Butcher, managing director at professional trustee company PTL and chair of the PLSA’s DC council, said the commission could facilitate a renewed policy focus on member outcomes rather than tax revenues.
“A lot of [recent policy changes] have been driven out of the Treasury and they haven’t been so great,” he said. “So I think a Pensions Commission is partly to try and reduce the grip that the likes of the Treasury has on this.”
Engagement v compulsion
While policy can achieve a certain amount, some of the onus to act will also fall on schemes and providers.
Turner called for innovative solutions to combine advances in fintech with the lessons of behavioural economics, while Andy Cheseldine, partner at consultancy LCP, suggested a more straightforward interpretation of nudge theory.
“We’re seeing employers nudge their employees and say, ‘You’ve dropped your contributions, is that temporary?’” he said.
If the industry is unable to raise contributions without raising opt-outs, compulsion may have to be considered.
But Emma Douglas, head of DC at Legal & General Investment Management, remained positive in her outlook: “There’s plenty of other things we can do around the communications, around nudges.”
