Michael, it’s not Auto-Enrolment’s that’s failing low-earners!

“Automatic enrolment is failing many low earners. Millions of them are both serial borrowers via consumer credit, paying APRs in excess of 30%, and auto-enrolled into default funds typically targeting an annual real return of under 3%.

The DWP should have a duty to guide people into capturing this huge spread for themselves. It should actively encourage automatic enrolment providers to differentiate between employer and employee contributions, the former being invested (as today), and the latter first being used to eliminate any outstanding high cost consumer debts.

In addition, interest is being serviced with post-tax income. Alternatively, by not paying interest at 30%, a basic rate taxpayer would be effectively generating a 37.5% gross return which, if wrapped within an ISA or a pension pot, would be tax-free. And entirely risk-free.

Saving through “negadebt” (negative debt) provides the best risk / return of all.”

Michael Johnson on Linked in

Do not underestimate the value of pension saving Michael!

Michael Johnson is wrong on this and I want to explain three reasons why reducing “negadebt” is not a substitute for building a nest egg in retirement.

Not only is he wrong, but many pension experts are wrong in looking to unpick the lock on pension savings in favor of what Steven Groves calls “the savings waterfall” (pay off expensive short term debt, create emergency fund etc..).The experts are missing the central success story of auto-enrolment – that it’s getting everyone saving for a common aim. But – lest I be accused of “arm waving”, l’ll be more specific…

The arguments for including all savers in auto-enrolment are

1) fiscal – savings for those on low incomes are by law incentivized (though many are missing out through the net pay anomaly

2) behavioral– even in the darkest times , we need a light at the end of the tunnel

3) societal – if we carve out a proportion of the population as “too poor to save”, we create a savings underclass.

I could add a fourth – “operational” as creating extra complexity around the opt-out – especially a split opt-out where only employee contributions are stopped, is a recipe for disaster.

Why auto-enrolment works as it does

Auto-enrolment works because it is one system that covers everyone with the same rules applying to both rich and poor. The very lowest earners do not get enrolled because they are not eligible jobholders but they are entitled to opt-in, those at the top end of the savings ladder may have to opt-out to protect fiscal protections such as the LTA but in a very real sense – we are all in it together. AE is financially inclusive and Michael Johnson’s proposals undermine the solidarity that AE is creating.

Auto-enrolment is also supposed to provide financial incentives to save for those who are on low incomes by granting them the equivalent of tax-relief, even though they don’t pay tax. However, the net pay anomaly is denying about 1.75m what amounts to a 25% boost to their personal savings and the failure of HMRC to address this problem is one of the great black marks of the AE settlement.

Michael Johnson’s comments seem to be based on fiscal neutrality between ISAs and pensions for the low earner – but ISAs (as Martin Lewis constantly points out) have no fiscal benefit to those who don’t have large amounts of savings) and pensions have the capacity to be EEE to the low paid.  Michael’s arguments also ignore the impact on the low-earner/saver’s capacity to get UC and its derivatives.

Finally I do not believe that many people behave in a rational way about debt. When I see cash going into the collection bowl at church, I see people who would be better spending money on themselves giving money away! How can this be? In a rational universe where people weigh up the percentages, Michael may often be right, you may be better paying the loan shark than your workplace pension, but that is arguing at the extreme of debt. For the vast majority of people with personal debt, the issues of savings (spending on their future) is ring-fenced from debt management and goes on independently.

It is of course possible to opt in and out of workplace pensions pretty much at will and many people do take payment holidays at times of financial hardship, those few who continue to save when in deep financial trouble are worth talking to, as I suggest in a comment on Michael Johnson’s post

It would be interesting to know if the people who have long-term savings and acute short-term debt would want to opt out of saving or whether they would prioritize regular spending on their future over better organization of their current finances. There are interesting questions here about “value”, that can’t always be answered in purely financial terms.

My comment sits next to comments from among others Steve, Bee, Steve Groves and Norma Cohen, saying precisely the opposite – but I remain adamant.

There is a solidarity in saving which is at the heart of auto-enrolment and people like Michael, Norma, Steve Bee and Steve Groves think too much. Michael speaks elsewhere about simplification but in practice his ideas make for more decisions amongst people who are seeking the guidance of defaults.  I wonder if the sheer cogitative capacity of these super-brains prevents them from understanding what it is like to have less financial confidence and less ability to either take or implement decisions.

I can justify what might appear to be a hugely patronizing statement by adding that in the management of my own finances, I have often been in a position where I – for reasons of mental of physical sloth, failed to stop saving to eradicate negadebt. The further towards retirement I get, the less heinous such financial incompetence now seems.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Michael, it’s not Auto-Enrolment’s that’s failing low-earners!

  1. Peter Tompkins says:

    This is a tough subject, Your theme echoes a concern I had just before Christmas.

    A good friend of mine came to me to ask me to help him with his pension. Obviously I told him that I could only talk generically. When he offered to pay me I told him it was legal for me to give him unpaid general advice but illegal for me to charge for unregulated specific advice! He was a lawyer so he got it.

    Well, my friend is in serious debt. So he wanted to use pension freedoms to get his pension money. It felt so wrong to me but I helped him (making sure he staggers his withdrawals to avoid having it all taxed at 40 or 45%). And he does have a London flat which generates him a retirement income so he isn’t penniless but it just grated with me to see pensions paying off debt.

  2. Richard Chilton says:

    It is a lot about circumstances and psychology. It can be very attractive to pay off a high cost debt that came about through a once in a lifetime event. However, there are some people who are persistent borrowers. The only thing preventing them borrowing more is their credit limit. If they got a “windfall” from pension money to pay off borrowings, they are likely to just borrow more to take them back up to their credit limit.

    I used to do more Financial Capability training than I do now and it was interesting to see the divide between the borrowers and those who would never borrow however dire their circumstances.

  3. michael Johnson says:

    Henry, you have overlooked a crucial element of my proposal, which is that employER contributions should indeed continue to flow into a pot for retirement, not least for some of the reasons that you so lucidly describe. But you raised some much deeper questions, some politically charged, along the lines of are we a society of individuals or a collective? I like defaults for their collective good (let inertia do its work), whilst leaving the individual free to choose.

  4. henry tapper says:

    I am aware of your proposal to keep the employer contribution but (like Adrian Boulding) think the participatory principle is really important

  5. Martin T says:

    Happy 2021 to all

    re “It is of course possible to opt in and out of workplace pensions pretty much at will and many people do take payment holidays at times of financial hardship”

    This statement is only true if you add “if allowed by the employer”.

    Opting out of a scheme used for AE does not give you the right to opt back in at will. If you asked to opt back in the employer could withhold consent for a year. This AE rule is obviously designed to stop payroll departments having to cope with people changing their arrangements for every pay packet, an error prone and administratively costly possibility. (I knew of one lady who changed her salary sacrifice childcare vouchers weekly as it was allowed by the scheme but then was frequently annoyed by the payroll administrator who could not always keep up!).

    Where an employer runs two or more pension schemes, e.g. one for management using an old trust based scheme with generous contributions and a second for auto-enrolment using minimum AE contributions and qualifying earnings, there will be a cost incentive to refuse re-entry to the first scheme and wait for auto-enrolment into the second. There is often a cost incentive to ban short payment holidays, although employers’ may well conclude the PR and staff welfare benefit can justify such arrangements.

    Henry, I do hope you don’t work too hard and that you and Stella (and Olly?) are continuing to recover.

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