AE – what next?
01 July 2019
This article was featured in the July/August 2019 issue of the magazine.
Henry Tapper, director at First Actuarial, discusses contributions and doesn’t want to see momentum lost
We have got so used to automatic enrolment (AE) contribution rates going up as phasing unwinds that it’s quite disappointing actually to think we have no further challenges on the horizon.
The government, in its 2017 AE review, promised to introduce a pounds-one system, so that everyone is ‘in’ no matter how little they earn. However, there is no date fixed for this change and at the recent Payroll and Reward Conference, the Pensions Regulator could give no update.
I was co-presenting with the Pensions Regulator at this event and could scan the audience for reaction. It’s fair to say I saw and heard considerable frustration from delegates keen to see not just the abolition of the contribution-free lower earnings band but also an increase in the current 8% minimum contribution.
That there is scope to increase employee contributions there can be no doubt. Around 1,200,000 of those enrolled are currently paying not the promised 4% rate but the full 5% employee contribution – being denied the promised 1% government incentive. Since many on low earnings are not getting the promised tax relief and are not opting-out, the government can be encouraged that there is scope for higher contributions if it chooses to raise rates.
But I doubt there is much appetite in departments other than the Department for Work and Pensions (DWP) for any mandatory increase in employer contributions. The reforming zeal of Steve Webb seems a long time ago. Since his departure the role of the pensions minister has been downgraded to a junior position and while AE has been bagged a success, it is clearly not a Brexit-buster.
...momentum created by the statutorily required phasing of contribution rates being continued voluntarily by employers
The question of increasing contributions is now one for employers. It is within an employer’s gift to increase their contributions unilaterally, though at a time of low wage inflation it is a brave employer that has required higher contributions from staff. With the vast majority of employers operating at the AE minima, staff are already being asked to cope with considerable contribution increases.
The question now being asked by the DWP and pension providers is what scope there may be to see the momentum created by the statutorily required phasing of contribution rates being continued voluntarily by employers. There are various ways that this can be achieved, and I’ll explore just three.
The first and most painless is salary sacrifice which has been around a long-time but is due a revival of interest now so many staff are paying gross 5% of band earnings to their pension.
The second is the use of innovative contribution structures, such as matching, where employers offer to pay more into a workplace pension if the staff member does as well. Generous matches can be 2% for every 1% non-statutory employee contribution. Most matching is a 1-for-1, or the rather ungenerous 0.5% for 1%.
The third is one that encourages staff to contribute more, without the fiscal stimulus of salary sacrifice or the extra reward of matching. The best way of achieving this is through what is billed as financial education in the workplace – though ‘financial education’ can be a euphemism for hard-selling from insurers keen to make workplace pension schemes commercially viable.
What is evident is that staff are reluctant to pay more into a workplace pension unless they are clear where their money is going and how they can get it back later in life.
Younger people are increasingly concerned that their money is invested in a socially responsible way and there’s growing evidence that if they understand and like their investment strategy, they will choose to save into a workplace pension.
As people get older, thoughts understandably turn from investment to disinvestment and the spending of cash. Research by AgeWage has shown that as people near the end of their working careers, their principal interest is in understanding historically what has worked for them. Older people will contribute to workplace pensions, but their motivation tends to be about efficiency in terms of tax. Increasingly, consultants are reporting that people in their fifties and sixties are finding ways to recycle their wealth through pensions making use of the various pension allowances available to them.
Pension freedoms and AE have revolutionised the importance of pensions to employers’ reward strategy. Workplace pensions are now expected rather than encouraged and pension awareness is higher among both employers and employees.
The momentum that has been created by these two initiatives could run out. I hope it doesn’t and that readers of this piece will feel inspired to explore some of the ideas within it.