The economic signals are bad; Britain stands on the brink of a recession. The market is pricing in a doubling of interest rates , inflation is expected to go to 10%,people are paying taxes at an all time high and wages and pensions are not keeping up with these extra liabilities.
Millions of ordinary people are dreading the next 24 months, but pension experts, led by those who have most to gain by increased minimum contributions to workplace pensions, insist that no not pushing them through the Queens Speech was a “missed opportunity”.
Pension providers are ceaselessly telling us they want to improve member outcomes. But surely the outcomes for members faced with the choice of defaulting on debt or staying in workplace pensions will be improved by opting out of the latter. And for those, “just getting by”, the choice may be to struggle on – paying all bills but depriving them and their families of the simple things in life they should take for granted – and the pension experts will continue to take for granted.
For those who have forgotten how auto-enrolment works..
Opting out of AE is not a once and for all decision, people who have opted out are auto-re-enrolled at each re-enrolment date. Opting-out can be the equivalent of a pensions holiday and it’s an option we should not be overly exercised about.
Staff who have opted out need to be recorded as dong so both by employer and provider. If they are not reminded by re-enrolment, they will likely find themselves enrolled when sooner if they move jobs. We forget how hard it is to consistently remove yourself from pension saving.
And many people know how the pension system works. We think nothing of telling the pension wealthy not to contribute if they have a protected Lifetime Allowance, that’s because they people matter to pension experts, they are the high-earners that employers value. But pension issues are even more important for those with low incomes and low expectations for their state pension.
For these people there is little incentive to stay in a workplace pension. Since the abolition of the “savers credit”, savings into workplace pensions work against savers when they cannot get to their full entitlement to the state pension. If they could afford advice, or even get targeted pension guidance from Money Helper, they should be told that starting saving into a workplace pension close to retirement is a bad idea. The pension poor are aware of this and thought we like to call this behaviour “shameless”, is it any different from the high-roller avoiding paying supertax on the top slice of their pot?
The incentivisation of low-earners to stay in pensions should be one of the reforms the DWP considers, as and when they look at the basis for pension credit. Pension credit and auto-enrolment could work a lot better together, pension credit was a child of Gordon Brown. conceived in an era that predated mass saving.
A bad look for providers
In truth, all this talk about “financial vulnerability” seems to fly out of the window, when savings rates are under discussion. This does not go un noticed.
I am going to continue to point out that the same providers who advocate higher contributions through the enactment of the 2017 AE reforms are avoiding getting involved in issues to do with pensioner poverty. These issues are often triggered by participation in the plans they foister on vulnerable savers.
Help for employers
Is anyone in pensions thinking about the VFM of AE contributions from an employers point of view? Do employers want to see staff wellbeing put at risk by denuding the take home of employees who may struggle to pay the fares to get to work? Who wins when such employees find not working more lucrative?
And the same can be said for employers who are often required to include short-term workers in plans that are likely to be left behind as these workers return in later life to their countries of origin. I am thinking of the many seafarers with small pots in master trusts who may never be traced. Try finding your seamen who are back in Manilla.
One of the solutions to the small pot problem will be the pension dashboard, we should make sure that the URL is engrained on all who have small pots so that they do not lose these small pots, but we should also make sure that employers can “sell” the AE pension contribution as a top-up to the reward for low-earners. I suspect that many employers with high numbers of itinerant workers – and Brexit may have dispersed workforces further – are able to sell pension pots as payable anywhere in the world as deferred pay. Otherwise the employee contribution for the itinerant worker looks like just another tax.
Increasing an unwanted pension tax with so little support from the pension system is a tough ask. My bet is that the inclusion of the 2017 AE reforms will happen only when we have a pension dashboard up and running. That is the provider’s quid per quo. A properly functioning pension dashboard that an employer can point to as the means of getting value for money saved, is a pre-requisite for getting buy-in from employers and staff.
Tough times ahead for employers , now is not the time
And coming back to my original subject, the implementation of the 2017 reforms, has anyone stopped to think of the choices employers have right now?
Employers have no choice but to pay higher national insurance (supposedly for a better NHS) and have to swallow increases in energy prices and the impact of inflation from other suppliers. Consumption is unlikely to improve in a recession, meaning that tens of thousands of small businesses will have choices as to whether to protect salaries through inflation adjusted salary increases or pay more into pensions. Frankly we are kidding ourselves if we think that any Government is going to take on the CBI and Federation of Small Businesses when demanding more for pensions.
Doing more with what is in the system
Like the greedy cuckoo, our auto-enrolment providers want to feed on the wages of the poorest, drain what little profit employers will be making in the tough years ahead. They want to line their nest at the expense of ours, by demanding enactment of contribution increases at the least appropriate time.
If these providers want to make the most of the savings we give them, they should invest in systems that empower members to turn pots to pensions or transfer pots to pension providers who do.
Right now , I see the cuckoo in our nest, while our nests remain bare of feathers. The cuckoo should stop squawking, accept that reforms will have to wait and get on with improving the value of our money.
Pots to pensions? This aspiration does not progress as the question of who will assume the risk is never identified. Companies who have this risk already are running for the exit. So the trend is in the opposite direction. Fiscal drag will further devalue the LTA
Just to back up your main headline, I was very involved in the development of the policy that created AutoEnrolement. The DWP worked with employers & pensions industry representatives to create a top up DC pension system that would work, and coming up to 10 years in October has worked for the accumulation aspect, but has yet to deal efficiently with the decumulation aspect. When it comes to increasing the minimum statutory pension contribtions, the levels set started low and increased over time to get to the agreed initial minimum of 8% of upper band earnings.
The minimum AE age of 22 was set also for a reason. Younger employees that wanted to have pension savings could opt in.
Employers and Employees could be in AE schemes where the contribution level was set at higher amounts than the minimum.
Guess what, that is still the case today!
All that is nissing is the awareness, which is a comms issue, probably best left with the DWP.
The kicking in of AE at a higher earnings threashold was added to stop low earners contributing to what would be a small pot that would reduce entitlement to pensions credit. Much effort in 2006 was put in to getting the Government of the day to sort out the state pension so that more people would have a higher starting State pension by the amalgamation of the additional state pension with the state basic pension to form the new state pension from 2016.
Pensions credit as created by Gordon Brown has always been a dissincentive for lower paid people to save for a pension. Now with the state pension soon to be topping £10,000pa the pensions credit system does need reform to pick up anyone who for whatever reason are not able to be paid the full pension when they reach SPA (at an increaing age as the 21st century rolls on). More policy work needs to be done to enable low paid people to have NI credits for state pension during their working lifetime, so that when they reach SPA they have at least the 35 years of NI credits needed for the full State Pension
AE works, Pension Credits need modernising, DC decumulation does not work and communications on pensions need improving, particularly from the DWP. we do not need to increase the AE minimumums at this statge, but we do need to let people know that the minimum will not lead to a life of luxury in retirement when ever that may be.
Let’s be honest, for the majority of people, AE is not going to provide any pension.
It will provide £100,000 – £150,000 amount from which the employee will pay off their mortgage, buy a better car and a new kitchen before retirement. Many people cannot wait for age 55 to access their “pension savings”, some taking small commutation for pots, generating the Money purchase annual allowance (MPAA) etc.
We need to be real and watch what people are doing with these AE pots and previous money purchase pension plans which AE replaced.