The auto-enrolment timeline is now halfway through staging – as the PPI’s FutureBook2 tells us. while coverage from workplace pensions is spreading, it is also thinning. Average contributions are lower than ever before and there are two worries;
That people will get used to the new normal of 1% employee contributions as “their pension”
That when the Government turns the heat up on contributions, we will see opt-out rates leap-frog.
The frog reference is apt as the nudge theory behind auto-enrolment is used in cooking for boiling a live frog. Apparently a frog in tepid water will fall asleep and not wake up if the heat of the water gently increases. However, frogs will resist being thrown into boiling water by jumping out of the pan. People contributing to pensions are thought to be like frogs – they need to have the heat turned up gradually.
At the moment we are all drawing breath, hoping that opt-out rates won’t exceed the 17% reported by the DWP for employers with less than 30 staff. We are also hoping that with the help of accountants payroll bureaux and the odd IFA, small employers will follow the Pension Regulator’s Duty Checker and stay on the right side of the law.
While we are drawing breath, we are already thinking about 2018 and 2019 when contributions made by those auto-enrolled jump to 2 and then 4% of band earnings.
There is a lot of concern that the people who took the decisions on the auto-enrolment timeline – Steve Webb, Ian Duncan Smith and ultimately Osborne and Cameron are no-longer in office. To Hammond and May auto-enrolment is someone else’s idea. Do they want to be in office when the pot boils over and frogs have palpitations?
The concern centres on time; pension pots grow based on the amount paid in and the timing of those payments. Delaying payments by pushing back the auto-enrolment may not give those payments sufficient time to grow to something useful.
While no one wants to be cruel, we do want to be kind. Governments are no different, at some point this or a subsequent Government have to be cruel to be kind. While those people who know about pensions and care about outcomes want contributions to increase as soon as possible, there is little incentive to annoy the population “on our watch”.
So while we are drawing breath, plans are being hatched to push back the auto-enrolment contribution increases into the next decade. Not only will this mean that AE is delivered 15 years after its original announcement in 2005, it means that a generation of savers will have missed out on contributions.
While this may be of little consequence to the politicians past and present, it will be of considerable concern to the Treasury, the Government Actuary and the DWP in the following decades. For if we cannot increase private savings rates, we will have to meet the demand for subsistence retirement incomes on a pay as you go basis.
For generation rent- those who’ve entered the workforce over the past fifteen years, that means poor pensions and higher taxes and national insurance to pay for everybody else.
Which calls for an even sharper intake of breath.