There has been criticism of the DWP and Treasury’s Mansion House reforms as not constituting a coherent vison for pensions. I think that this is misguided. Whether in relation to corporate DB, LGPS or DC pensions, the reforms represent a substantial change in emphasis.
This blog looks at one aspect of the big picture that has received little attention but which amounts to the biggest change for low and median earning DC savers, the implementation of the 2017 AE reforms.
Almost forgotten in the blizzard/avalanche/tsunami of papers issued last week by the Government to justify the Mansion House reforms was something called
It contains this summary table for the median earner. It tells us that Government see nudging middle earners to higher AE contributions has easily the highest impact of any of the changes on the way. But it’s not the only thing – a third of the improvements come from investments rather than contributions
and this table for the low earner. Here the impact of AE changes is almost as high as for median owners but a massive 75% of the improvements envisaged come from turning up the heat on contributions.
The third table that really interests me is stuck in the annexe. This adds in another comparator – gender and another factor (CDC turning pots to pensions)
This isn’t the aimless doodling of a civil servant with a spreadsheet, these are numbers on which the DWP and Treasury are working out the replacement ratios for everyday people from days the days that they are working to the days when they are living on their savings.
What the numbers tell us , taken independently – the pension gender gap will continue to widen but that both men and women will see substantial increases from changes in contributions , investments and the conversion of pots to pensions.
While lower earners will get more from increases from contributions, most of which they will pay for upfront, they won’t get the same kicker from investment and strangely , there is no estimate for them of improvements in their pensions from CDC.
What does this tell us?
Most of the attention on this paper has been on the justification for the Chancellor “selling” the 5% allocation of workplace pensions to productive finance as a £1000 pa increase in future pensions. There has been a lot of boring analysis of this which is really missing the point. The point is that Government wants workplace pensions to reverse from lowering charges to going through the gears to improve investment returns. As has been pointed out, investment returns could be destroyed by high charges and the Government is probably under-cooking both the costs and returns from Nicolas Lyons VC superfund.
But that is one of the smallest elements in the master plan. The big policy wins are about increasing AE contributions , successfully implementing the VFM Framework and launching CDC as a decumulation “product”.
Since the AE increase will partially be paid for by the tax-payer, in increased tax-relief, it is the VFM and CDC decumulation proposals that stand-out. The extra allocation to PE looks like window dressing.
I’ve covered in recent blogs, the VFM Framework and CDC, both of which are going to take a long-time to be implemented and longer to make an impact. The AE reforms however are being introduced via a private member’s bill.
Listen to really important @UKHouseofLords debate that paves the way for massive improvement in #pensions for young workers and low-earners. Instead of £300pa into a #pension, someone earning £10k could get £800pa https://t.co/MLOZQ5jrAU#autoenrolment Bill is next stage of a/e
— Ros Altmann (@rosaltmann) July 16, 2023
The DWP are calling this “maintaining the momentum” on auto-enrolment. In practice is is simply fulfilling a pledge made in 2017 to make changes to the contribution formula by the middle of this decade.
However , this Bill is limited in what it can do. This is the DWP’s statement on it (made in March)
- The intention is that the provisions in this Bill will not result in any immediate change but will give the Secretary of State powers to amend the age limit and lower qualifying earnings limit for Automatic Enrolment.
- There will be a statutory requirement to consult and report on the outcomes to inform the implementation approach and timing, before using these powers. This will help ensure the strong consensus that underpins the success of automatic enrolment is maintained.
What Pensions Minister is actually doing to maintain the momentum built up pre-Covid for auto-enrolment is to support the Bill.
However, implementing the changes will be at a cost, not just in terms of tax-relief, but to the savers whose contribution rates will increase. We know from the time it has taken to get a promise on the “net pay” restitution, that HMRC are slow to give up on revenue. Pension incentives to low earners are not considered a priority.
Now – more than ever – we should be looking to maximise the effectiveness of people’s retirement savings.
Covid doesn’t seem to have done much harm to people’s saving, but the cost of living crisis, that has followed, is undoubtedly making it harder for people to save, put pressure on Government finances and stalled proposals (the 2017 AE reforms) to increase contribution rates from individuals and employers to workplace pension.
Here is the commitment made in 2017
We are setting out a comprehensive and balanced package of reforms which together would increase median earners’ private pension provision by over 40 per cent and lower earners by over 80 per cent.
• We are continuing to make saving the norm for young people, by lowering the age threshold for automatic enrolment from 22 to 18, enabling more people begin to save. Confirming that automatic enrolment will continue to be available to all eligible workers regardless of who their employer is, or the sector in which they work;
• We are supporting those with low earnings and multiple jobs to save by removing the lower earnings limit so that contributions are calculated from the first pound earned and everyone has access to a workplace pension with an employer contribution.
The DWP said in 2017 that it was spending time and money looking into how AE could work for the self-employed. It has been doing this for more than half a decade, during which time many self-employed have stopped saving into pension savings schemes while few have started. We have and continue to go backwards with the self-employed (at least if you think they should be using pensions to save for the future).
Many will argue that now is not the right time ,but was 2012 the right time to implement the AE staging time-table – is there ever a right time?
Where is auto-enrolment in Government’s pension plans?
Auto-enrolment is the gamechanger for Government. It has transformed a failing policy on personal and stakeholder pensions into a booming pension savings framework. The big three changes that the Government has in mind to increase the momentum of regotm are
- To increase AE contribution rates
- To improve the efficiency of investments through the VFM framework
- To improve the efficiency of decumulation through CDC
Of these, only the increase in AE contributions can be considered less than speculative. The DWP and Laura Trott should be mindful that AE continues to be her surest lever in achieving greater retirement self-sufficiency for the UK workforce