OpinionApr 16 2014

Auto-enrolment: Tinker or let it be?

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No one can dispute that auto-enrolment has so far been a big pensions success although I would not quite go as far as pensions minister Steve Webb when he proudly talks about it kicking off a ‘savings revolution’.

More a stirring than a revolution in the Fidel Castro sense of the word, although it is hard to deny that good hardy savings seeds have now been sown.

The figures speak for themselves. Since the auto-enrolment bandwagon rolled into town in October 2012, more than 3m workers have begun saving into a workplace pension while some 10,000 employers (all big concerns) have now automatically enrolled their workforce, most employers complying without a whisper of complaint bar the 590 that have triggered investigations of non-compliance from The Pensions Regulator.

The result is that the pensions savings habit is spreading or as Mr Webb prefers to say: “We have restored fairness by ensuring pensions are no longer the preserve of the few.”

Mr Webb is right to be content. Opt outs are running lower than expected – 10 per cent rather than 15 per cent – while the mighty Nest recently conducted research that indicated auto-enrolment had pushed pensions right up the list of consumers’ priorities.

The nation is saving again. Indeed, even the august Office for National Statistics believes the savings ratio is far higher than previously reported – more 10 per cent than the reported 5.1 per cent. Prudence is in, profligacy is out.

Auto-enrolment is also bringing associated benefits (so Swiss Re tells us) in the form of greater employee take-up of death benefits, long-term disability cover and critical illness cover. So big hurrahs all round.

Of course, a little perspective is always necessary where government initiatives are concerned. Auto-enrolment is a key plank of the government’s determined policy to shift the onus of providing for the nation’s retirement funding from the State to employers and employees. As a result, it cannot be seen to be failing – and sometimes the hype is overdone.

By way of example. What a coincidence that the three millionth employee to be auto-enrolled works for West Ham United, a football club whose vice-chairman is the marvellous Karren Brady who has been used extensively to publicise the merits of auto-enrolment since 2012?

This led to a gushing press release from The Pensions Regulator full of football cliches (“kicked off”, “supporting”, “league” and “match fit”). Come on Mr Webb, we are not that daft.

And we must not forget that in many cases, auto-enrolment is only happening at the lowest level with the minimum required contributions (2 per cent) being made by employees and employers. Such percentages will hardly stir a savings revolution.

Also, only the easy part of the auto-enrolment regime has been installed so far. Getting big employers to step up to the auto-enrolment mark is one thing. Getting smaller concerns to comply is altogether more arduous. Between now and April next year employers with between 50 and 250 employees will have to become auto-enrolment compliant with smaller businesses following thereafter.

Resistance among these employers is bound to be higher. Only recently, a survey from NOW: Pensions (big into auto-enrolment) found that 44 per cent of smaller firms had not given any thought to how they would find a suitable pension scheme. Such a failure to engage in the auto-enrolment regime is worrying to say the least – and I hope it is an issue at the top of The Pensions Regulator’s agenda.

Against this backdrop, should we now all sit back and allow the giant auto-enrolment programme to complete its roll out in 2018 before tinkering?

Should we now all sit back and allow the giant auto-enrolment programme to complete its roll out in 2018 before tinkering?

Last week, I asked a couple of top financial advisers for their opinion.

Malcolm Coury, the hugely respected managing director of Bath-based independent financial adviser Money Wise, believes the government should be doing more.

He is fearful that as the minimum contribution required under auto-enrolment rises from 2 per cent to 8 per cent by late 2018, opt outs will increase significantly. He believes, therefore, that incentives, in the form of a reduction in the burden of national insurance contributions for both employers and employees, are necessary.

“It seems erroneous of the State to continue to take high levels of NI contributions,” he says, “while legislating for people to make their own retirement provision which is relieving the pressure on the State to provide retirement benefits. There needs to be a quid pro quo here. Reducing NI contributions would act as a spur for greater pension savings.”

The much hyped £2,000 employment allowance, enabling businesses to reduce their liability to NI contributions, is a mere drop in the ocean.

Jon Dixon of Cheltenham-based Attivo Financial Planning is more relaxed. He says: “As a nation with an ageing population we need to save more for old age or expect near poverty in retirement.

“The building blocks of a savings revolution are now in place – auto-enrolment, transparency, awareness, access, value and simplicity.

“If after 2018 the experiment has failed to change old habits an extra incentive in the form of reduced NI contributions may be needed. But with opt outs at around 10 per cent, let’s hope the initial success of auto-enrolment helps build a new layer of national wealth.”

What’s your view on auto-enrolment? Will it be the catalyst for a savings revolution in this country or does the government need to do more as Mr Coury suggests? I would love to hear your thoughts because mine are not quite yet fully formed.

Jeff Prestridge is personal finance editor of the Mail on Sunday