Shake, rattle, enrol

Though still in its infancy, the new regime has been introduced with such devastating efficiency that the government has been able to turn its attention to ripping up the decumulation stage of pensions, safe in the knowledge that any shortfalls arising from the accumulation stage are now fixed.

Opt-out rates –which were anticipated to be somewhere around 25 per cent before the roll-out – have so far been in single figures. Breaking that down further, anecdotally the rate drops to around 3 per cent for under-30s and only rises to 8 or 9 per cent for those who see themselves as being too near retirement to have time to save anything meaningful anyway.

But will the youngsters have time to save anything meaningful themselves? It strikes me that, amid all the backslapping, we are overlooking a huge issue that is being stored up. According to all informed opinion, the rates at which people are saving are nowhere near enough to achieve the desired level of retirement income.

Even recent DWP figures that trumpeted the higher numbers saving in a workplace pension quietly had to acknowledge that the increase in members was nowhere near matched by the change in total contribution levels.

Everyone knows people should save more but, while celebrating the admittedly impressive opt-out figures, we have been collectively ignoring the fact they have been achieved on the basis of a 1 plus 1 per cent contribution.

We have been so fixated on take-up rates that the most commonly heard worry about the increase to 5 per cent in 2017, and then 8 per cent a year later is that it will prompt more to opt-out. This is almost certainly true, but might it be a sacrifice worth making?

Let’s sign everyone up at 15 per cent, however that is split up

Instead of fretting about leavers, we should be pointing out that even a fourfold rise in minimum contribution level still does not represent an adequate level of saving. Most research consistently posits 15 to 20 per cent a year as the minimum contribution to maintain a standard of life through retirement.

There is a vague acknowledgement that contributions should be higher.But any concerns have been drowned out by fears over driving people away from saving at all.

There is a tacit acceptance that the fact contributions are so low has been the key factor behind the higher than expected take-up of auto-enrolment so far.So when it came to setting the minimum rate at which people should be auto-enrolled – and, consequently, the rate which the overwhelming majority of employers will opt for –we arrived at a halfway house compromise that fails to solve either problem

The total contribution of 8 per cent has been pitched in such a precise way that it will be enough to annoy people (and employers) but not enough to have any meaningful impact on their retirement saving. The figure proves that we are interested in ensuring people are saving for their retirement, but not really bothered whether they are saving enough.

It is time for the much touted ‘soft’ compulsion to stop being so soft. Not in terms of barring opt-outs completely, but rather in terms of ensuring people saving toward their retirement know how much they need to save.

Contributions should be dragged up to levels that offer a realistic chance of holding a decent sized pot at retirement. Otherwise even those who have diligently saved – at a level sanctioned by the government – will arrive at their retirement only able to afford a pale imitation of the standard of life they had hoped for. A very good thing will be undermined and the love affair with the concept of auto-enrolment will be brief.

I wrote last month how we have seen a reversal when it comes to pensions, wherepeople are now being handheld through their working life and left to shoulder the responsibility once they hit retirement. Maybe people should hold onto a bit of responsibility during their working life too.

Let’s sign everyone up at 15 per cent, however that is split up. It will hurt and we will almost certainly see increased opt outs, but those who do stay signed up will at least be adequately served by the scheme and see the benefits of being automatically enrolled when they do retire.

It might even be healthy to let go of the fixation with opt-out rates. The numbers remaining enrolled so far suggest we have won the battle of convincing the masses that they need to save for a pension; we now need to make sure we give them realistic expectations of how much it will cost.

At least that way those who remain will do enough. Even if a lower proportion of the population will be provided for in retirement, a higher proportion will be properly provided for. And we won’t go on kidding ourselves that we have solved the pensions crisis when, at current proposed contribution rates, the solution is nothing more than a sticking plaster.