In a lachrymose display of virtue signalling, the PMI reports that many employees are either reducing contributions to workplace pensions or thinking of doing so. This is neither surprising or regrettable, people need to take pension holidays from time to time, our job is to let them.
According to feedback from savers 28% of us do not think we will retire at all.
“It is tragic that all the good achieved by automatic enrolment over the last decade might be undone by desperate people being forced to make short-term decisions at the expense of their longer-term security.
“Concern about the consequences for retirement of the current crisis was shared equally across all age groups, all income levels and all regions. The nation as a whole has lost confidence in its prospects for a comfortable retirement, and that is something that should alarm us all.”
The language is too dramatic, people are not desperate, the nation has not lost confidence in being able to retire, we should not be alarmed. Instead we should recognise that from time to time, wages do not keep up with prices and when this happens, people cut down on non-essentials.#
Let’s be clear, compared with paying the mortgage or rent on time, compared with the impact of an impaired credit rating and compared with the loss of essential services through the non-payment of utility bills , the payment of the retirement premium is second order.
Ways of making pensions more affordable
This blog has been saying all year that we must find ways of making pensions more affordable for those with minimum available income. Here are the three solutions I put forward at this year’s PLSA conference.
Sensible providers, such as Smart, have circuit breakers in place that allow people to stop saving and determine their personal re-enrolment date. This is a worthwhile innovation that Smart can switch on at any time (though Smart tells me that they are yet to see sign of any major contribution “switch-off”.
Sensible employers, like SUEZ, have been preparing staff for some time , by opting them in to sidecar savings projects which will now be bearing fruit as they provide emergency cash for the hard-pressed and security for those who are just getting by.
Employers who offer pension schemes at a high cost to staff, should consider reducing the cost of accruing either a defined benefit or contribution from the workplace pension, either by cutting the required contribution for those on low pay (especially the low-paid in net-pay schemes). This has been actively considered at LGPS in the past and should be put on the employer’s table again. We do not need over-funded pension schemes at a time like this.
Is this a threat to pensions auto-enrolment?
Pensions auto-enrolment is uber-resilient. There is no sign that people have fallen out of love with workplace pension saving but if people are looking to reduce their payroll deductions to ensure they meet their monthly liabilities, they should not be badgered or coerced by over-anxious PMI members. Pension personnel who evangelise for long-term saving not only risk being deemed “advisers” but run-down what makes auto-enrolment great (the fact that savings in this country aren’t compulsory).
Pension contributions that can’t be reduced are generally considered as a tax (National Insurance). We compel people to save when the opt-out causes specific harm to others (the funding of the state pension is a collective endeavor that all working people participate in).
Auto-enrolment is considerably more resilient than we consider it. That is because we are so terrified of self-determination of how we get paid. But it was precisely the trust that was paid in the saver at outset, that made auto-enrolment such a success. From 2012, savers have repaid the respect placed in them , by saving and not opting-out. If they choose to manage their short-term cash crisis by taking a pension holiday , please let them!
What isn’t commonly realised is that there may be another very real hit to incomes that will happen if contributions are paused or stopped. Net earnings, as used in assessing means tested benefits, also take account of pension contributions. More generously than in some legacy benefits, Universal Credit disregards the whole of pension contributions when it calculates net earnings. That means that paying £50 a month into a pension scheme will reduce the income used in calculating UC by £50 a month. Lower-income means higher benefits and, for £50, the application of the UC taper means that the benefit will increase, in the following month, by £27.50. Conversely, stopping pension contributions of £50 a month will reduce the amount of UC by £27.50 in the following month.
That means that it is all too easy for somebody to think that by stopping a £50 payment they will be £50 better off, and better able to meet bills. The reality is that their real increase in spending power will be £22.50 while the loss in pension savings may very well be substantially greater.