Altmann backs auto-escalation

Altmann backs auto-escalation

Pensions minister Baroness Ros Altmann “would love to see” the automatic escalation of auto-enrolment scheme contributions.

Baroness Altmann pointed out there is “nothing stopping employers doing it (auto-escalation) now”.

She was speaking this morning (4 February) at the TUC’s pension conference.

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The pensions minister also pointed out that the government’s policy of timing planned increases in minimum contributions up to 8 per cent (from the current 2 per cent) by 2018 to be aligned with the start of the tax year was something of a “mini experiment” in auto-escalation.

This method of increasing people’s level of pension contribution to levels that will ensure an adequate retirement income was first proposed by Ms Altmann’s predecessor Steve Webb, but has so far been overshadowed by other priorities.

Sticking with auto-enrolment, she said the whole policy was at risk of failure if providers did not play their part.

“The most crucial part is for the industry to devise good value, engaging products,” stated Ms Altmann, also warning that many master trusts are risking people’s savings.

“I’m concerned that the type of scheme chosen can be crucial for the pensions of the lower paid.

“In net pay schemes, those earning less than £11,000 a year won’t get the tax relief due to them and may end up paying 20 to 25 per cent more than the same pension for a higher paid colleague.”

She added not all master trusts offer the earnings at source option that avoid this, mentioning recent warnings on from The Pensions Regulator on the subject.

In order to deal with low contribution rates, a number of analysts have suggested adopting auto-escalation.

Auto-escalation schemes allow employers to increase member contributions annually by a set increment, most commonly 1 per cent.

In the US the scheme lets savers start with a 5 per cent contribution to a 401(k) plan, the retirement savings plan in the US, and then add a 1 per cent increase every year up to a maximum of 5 per cent.

Research conducted by Putnam Investments in the US in 2014 showed that while the use of auto-enrolment is increasing among US 401(k) plans, the adoption of auto-escalation has been slower, even though plan participants indicate they would like to use it.