There is growth and there is growth – it looks like growing pensions through auto-enrolment is the wrong kind of growth.
Pensions have not been immune from the current political and market turbulence. Indeed they have been branded both victim and villain of the piece. This article is not about the problems that have been caused by the mini-budget but about what to payroll people is the “business as usual” of auto-enrolment.
The next big event for auto-enrolment is the implementation of the 2017 review commissioned by the Government and announced as going live in the middle years of this decade. The lead time for the legislation to be in place was assumed to be two to three which might , prior to the events this summer , have seen it on the statute books this summer. Instead of progress, the change of Prime Minister and reshuffle of DWP ministers now sees us with a new Pension Minister (Alex Burghart) and Guy Opperman returning to the back benches.
More importantly for changes in auto-enrolment , the new Minister has swapped “inclusion” for “growth” as the extension of his title , suggesting that his priorities will be more in supporting pensions as a feeder for the Government’s growth agenda than as a means of including more people in auto-enrolment. It will take some months for the new Minister to get on top of his brief and the PLSA is now arguing for implementation of the changes in the latter years of the decade, recognising that earlier promises have irrevocably slipped.
The PLSA is calling on Government to reform AE to get more people saving (such as younger people, multiple job holders and gig economy workers) and at higher contributions (by removing band earnings and gradually increasing contributions from 8% to 12%, split evenly between employers and employees). This is so that people on median earnings are more likely to achieve the Pensions Commission’s Target Replacement Rates.
However, such policies have two major barriers to overcome. The first is the reduction in net disposable income amongst those savers who have increased borrowing costs , higher household bills and higher overall taxes (assuming tax thresholds remain frozen). Add to this negative real earnings growth and it’s hard to work out where the extra 4% of earnings will come from , if not from what will be seen as another corporate tax.
The second barrier is indeed tax. Not only will an increase in mandatory contributions from employers with eligible jobholders be considered an extension of business taxes but the taxes foregone by HMRC, especially where National Insurance is being lost, may make the burden of an extension of auto-enrolment unfeasible.
Guy Opperman was fond of saying that there is never a good time to increase auto-enrolment and former Minister Steve Webb has echoed him by reminding us that auto-enrolment was launched in the aftermath of the financial crisis and in tandem with the implementation of the austerity policies that were in place throughout auto-enrolment’s staging.
So the question that is in the new Minister’s in-tray is unlikely to get a positive answer unless ramping up auto-enrolment contributions and extending its scope can be deemed part of the growth agenda.
Unfortunately for the hopes of implementation of the 2017 reforms, the evidence so far is that workplace pensions have been slow to adapt their investment policies to include the kind of growth assets that can “build Britain back better”. Again the big policy idea has been thwarted by the commercial reality that workplace pension providers compete for employer’s business on price and the price of a product that includes private equity, credit and infrastructure assets is considerably higher than for using plain vanilla investments (typically in passive funds).
So Alex Burghart is unlikely to be able to promote auto-enrolment as a means of getting growth into the UK economy. Which leaves the prospect of any major improvement in the coverage and depth of auto-enrolment on hold.
One ray of hope is a private member’s bill which is being introduced by the MP Richard Holden. Holden hopes that the 2017 AE review can be introduced by the backdoor, Considering the currently chaotic state of Government, he might just stand a chance.