If you had an AE magic wand, what would you do with it?
04 July 2016
Two caveats though:
Firstly, we should be mindful that because of the phased increasing of contributions (which weren’t part of the original planning) it will not be until 2019 before full contributions
are being paid, and that the increases represent a quadrupling of the initial levels. Many feel the increases are likely to have an impact on opt-out rates. I agree entirely with the Pension Minister’s view that the pensions industry needs to work both hard and creatively to properly promote the unique advantages of pensions as a means of accumulating wealth for old age; if this is done well it will help to counter the risk of spiraling opt out rates.
Secondly, the question of whether the official data around compliance rates reflects reality is an important one, covered in some detail in last week’s Focus on Friends of AE; as you probably know research has been published that suggests worryingly high error rates prevail.
Regardless of your view about the extent to which AE success levels ought to be celebrated, the fact is that the 2017 review will be happening so the question is:
If you had an AE magic wand, what would you do with it?
Or to put the question properly into context: What ideas and issues do you think should be covered by the 2017 review of AE?
This is a perfect topic for our LinkedIn group and to get the ball rolling here’s my list of suggestions:
- How do we educate pensions savers? – because people have been automatically enrolled they have not gone through any education/advice process so may be completely blind to pensions saving fundamentals and such as the workings of the stock market, why market volatility can be beneficial because of pound/cost averaging and so on
- ‘Enrolment doesn’t mean engagement’: So how do we drive up the levels of engagement? – it’s a huge mistake to think that somebody that has been automatically enrolled has in any way ‘bought into’ pensions savings. Contribution rates are so low at the moment that a significant proportion may not event be aware they’re in. We haven’t ‘won hearts and minds’ by automatically enrolling.
- How do we help the self-employed? Whilst some self-employed folk may be included (because they are classified as a Worker in relation to a particular role) the self-employed as a whole are outside the scope of AE, despite there being ample recognition of the vital part that self-employed people play in creating wealth and opportunities for our society. This is a huge policy disconnect that needs fixing. So what’s the best way to do it?
- How do we get contribution rates up? Present levels are too low, that’s understood by all. Some feel that should have been introduced at much higher levels from the off, without any phasing at all; others have the view that it was right to ‘get them in, then get them up’. We are where we are so how do we move forward form here? Is auto-escalation the right approach? I like auto-escalation but understand that not everybody does. If we don’t auto escalate what do we do?
- What is the right level of total contributions? I see this as a question that relates to how old the person is when they start saving into a pension, but even for youngsters a figure of say 10% may seem sensible, but 20% or more could be necessary for the vast majority of people saving into a DC scheme to achieve a reasonable ‘replacement rate’. What do you think?
- Ought there be an industry-wide campaign to positively promote the merits of pensions-saving? Perhaps this would help to mitigate the risk of spiraling opt-out rates as contribution rates rise?
- Should low earners be properly included? Let’s remember that millions of people are being excluded on the basis that they do not earn enough, even though these are the very ‘masses’ that AE was originally meant to take care of. How do we fix this?
- What can be done to rid the AE system of what I have been calling for years all the ‘unrewarded complexity’ that exists? i.e. all the complexity that most certainly exists that doesn’t really add any value at all, to anyone. The AE rules are riddled with it, so much so that you’d think the rule makers were not briefed to consider implement-ability when blueprinting the legislation
- Should we introduce compulsion? Would compulsion get rid of so many ‘wild variables’ (including opt-out rates and the overall efficacy of government policy in this space) and do the reasons for not introducing it really stack up when examined? Do those ‘reasons’ not just amount to the fear that politicians have that compulsion would make pensions saving seem ‘like a tax’. And to my mind the argument ‘people shouldn’t be made to save for a pension’ is countered by ‘I shouldn’t be made to pay taxes to pay for the more-than-basic-sate-pension for people that didn’t pay for it themselves’
- How do we make AE easier for all employers but particularly for SMEs and Micros for whom the administrative burden seems disproportionately high?
- How do we ensure that there are no ‘toxic products’ on the market, i.e. those products that are fundamentally flawed and not fit for purpose. Presently, it is perfectly possible for a poor product to be ‘put on the shelves’. Why? Why aren’t the products themselves regulated to protect the consumer? The proper regulation of Master trusts would be a big step in the right direction. What other steps could be taken to get unsuitable products out of reach of the consumer?
- Is there any conflict in the role of the Pensions Regulator? – would it be better for TPR to focus just on enforcement? Does their role to also ‘educate and enable’ create confused priorities within TPR. Don’t get me wrong, I think TPR do a fantastic job, but I am wondering if they would do a better job do moving forward if they just focused on enforcement. I’m not suggesting the vital roles of ‘educating and enabling’ are dropped but does it make more sense for those functions to be carried out by a different organisation? That organisation could be (and should be) led, run and delivered by the very same people in TPR presently, but it would be a separate organisation with an overall purpose to drive up compliance rates; with ‘existing’ TPR focused on finding and dealing with non-compliance. I remain unconvinced that there isn’t a conflict of priorities within TPR currently – am happy to be convinced otherwise.
- Should the Workie advertising be replaced with something that ‘had teeth?’ Is the present advertising style linked to the previous point about conflicted priorities?
- How do we sort the ‘pension selection’ issue? – both in terms of supporting employers with the decision-making process and also in terms of ensuring there are no unreasonable pension selection risks for non-authorised advisers. A big dose of well-communicated clarity is needed please
- How do we safely harness the potential power of Robo-Advice? This is a “new kid on the block’’ that wasn’t really part of the discussion when the Pension Reform Agenda was being formulated. It has huge potential, how does that potential get realized in the AE space?
- How do we best sort the mess that is ‘Relief at Source v Net Pay’? Enough said
- Would proper investment in financial education and financial capability (in schools and later) generate a healthy ROI? I think so. Do you?
- Would an ‘Independent Pension Commission’ help to de-politicise pensions policy and therefore bring about better pensions policy-making that took a longer-term view? I think so, do you?
- Should we move away from a system where the employer completes a declaration of compliance, on the basis that the present system is like allowing motorists to MOT their own cars?
- Why exclude the young? Why not make AE apply whenever the individual starts working? The age restrictions help whom exactly?
- Should HMRC not have a big part to play in all this? – perhaps the entire AE regime could be replaced by something radically simple, based on and worked through the tax system?
- Why not publish details of all non-compliance on TPR’s website? - on the basis that doing so would be both educational and ‘motivational’. Would the MI not be priceless in terms of helping the market deal with the realities of what’s happening?
- Should the whole approach of using Pay Reference Periods be overhauled? Perhaps align with NI periods
- Should the use of a common data format be made compulsory? – on the basis that this would drive up efficiency and data security whilst also driving down operating costs? PAPDIS would be a great solution, or at the very least a great starting pointWhy don’t all defaults have dynamic lifestyle funds? – asset allocation for a 20 year old is (or at least ought to be) very different to somebody in their 60s
We’d welcome comments on this topic through our LinkedIn group and in particular we’d be delighted to hear reasons why you agree/disagree with any of the above; and of course please do share your thoughts on any other points not listed at all.
There must be a great deal of sense in FoAE putting together a very long list of all the points that we think ought to be included; and we’ll be discussing this at the 21st July London FoAE meeting.
See you in LinkedIn…and hopefully in London on 21st July too