Another month, another report on how auto-enrolment is going. This time it is from the hard- hitting Public Accounts Committee and, as you might expect, it is a bit of a mixed bag.
I took three key things from what the Committee was saying. These are things we all need to remember over the next two and a half years if AE is to be the success it needs to be.
1. The challenge facing SMEs is big and it is not just about AE
There seems to be a general consensus in the report that AE has gone pretty well so far, but that the smaller employers now staging presents a new challenge. This is not news. Last month, extensive research was carried out with small employers and their business advisers, which also backs up what the Federation of Small Businesses report. Small employers do not really understand pensions or AE (and neither do they want to).
There seems to be a general consensus in the report that AE has gone pretty well so far, And SMEs have a lot of new things to deal with at once, such as implementing the national living wage, for example, at the same time as trying to cope with implementing AE contributions. Most will just want to focus on making a success of their business, and they will not have the access to the AE-dedicated resources that larger employers are likely to have been able to call on.
Small employers are likely to find that some of the big names they approach will not assist them, so help from their business advisers will be crucial in helping them to become compliant and achieve the right outcome for their staff.
Therefore, we need to ensure that AE stays on track through making sure small businesses have access to the help they need and making sure that the market is there to serve them. We also need regular appraisals from the Department of Work and Pensions and the regulator to ensure it does not hit the buffers, and that we are doing all we can to help smaller employers comply with their duties.
2. We need to encourage people to save more for their retirement
The report says that in the longer term, the success of AE will depend on the extent to which it leads to higher retirement incomes for savers. At the moment, low minimum contributions mean that while millions more people are saving, the amount many are saving will not amount to a sufficient income. Some people may even think that because they are paying something in through AE, their pension is sorted.
As the report states, some people are likely to be disappointed with their pension. So what can we do about this? One of the tricky issues here is that one of the biggest reasons AE has been a success is inertia.
After all, 1 per cent of your salary leaving your payslip each month probably looks minimal to most, but the figure suggested by the Pensions Policy Institute of 11 per cent to 14 per cent would make a sizeable dent for a median earner. That is what they think would give a two in three chance of an adequate retirement income. And that is adequate, not good, and one in three still would not have an adequate retirement income. We need to remember that not everyone is in the same position, as lower earners might not need to save more than 8 per cent to achieve a good outcome. But however you cut it, we have a problem. And that is even before we talk about the under-pensioned.
Scheme charges are also a massive issue. As the FSB highlighted to the Committee, greater transparency and clearer communication is needed. The charge cap helps to some degree, but at the moment, providers can charge differently, which hinders comparison and transparency. Dual charging means that some schemes are getting away with charging more than the 0.75 per cent cap for certain savers. Our view is that, ultimately, consumers will not be getting a fair deal until all schemes charge in the same way.
The big recommendation here, though, is around small pots. The Committee has asked the DWP to set out a clear timetable for how they should be treated. They focus on an approach for helping people with small pots understand the overall value of their future retirement income.
It is a step away from previous plans for pot follows member, and this says to me that the impetus is now firmly behind a pensions dashboard – an online one-stop shop where people can see all of their pension savings. This would aid decision-making at all stages of the retirement saving journey, which would give people greater choice and control, and, importantly, aid transparency.
3. The long-term sustainability of schemes really matters if AE is to succeed
Another area the Committee expressed concern about was the status of the taxpayer-subsidised loan given to the National Employment Savings Trust (Nest). This was £387m at the time of their last annual report in March 2015, and there has been no indication as to when the loan will be paid back, or indeed if it ever will.
What this demonstrates is that providing AE to the mass market is a scale game that is not to be taken lightly. This is why we think that there needs to be much stronger barriers to entry to providing mass-market pensions. The regulator needs to make sure that schemes are in it for the long haul, and it can only do that by making sure they have robust business plans and meet a certain level of quality.
Ultimately, the Nest loan may end up being written off, chalked up to experience, or seen more positively as being part of the investment that finally helped the UK develop a strong lifetime savings culture. But we need to remember that it is not just about Nest. Small employers deserve choice, and there are a number of providers with different offerings that are very active in supporting this section of the market.
One point I would like to see the Committee focus on is the extent and validity of the government subsidy to Nest. We all know that the restrictions that were a fundamental part of the European Union state aid case will be lifted in 2017. But what we do not yet know is what Nest will charge for transfer business. This could create a significant market distortion.
Charging members an upfront 1.8 per cent to transfer their pension seems unfair to the member, bu not levying anything feels like the government subsidy is giving Nest an unfair advantage through subsidising transfer business. This is worthy of public scrutiny and the DWP should come clean on how it intends that Nest charges for transfers.
The market is developing well and, while it is too early to pop the champagne cork, AE has gone as well as can be expected so far. However, as the Committee says, the real challenge is yet to come.
Darren Philp is director of policy and market engagement at the B&CE, providers of The People’s Pension
Key points
The Public Accounts Committee has published a report into AE, saying that it is good in parts
The challenge will be smaller employers who do not really understand pensions or AE
Another area the Committee expressed concern about was the status of the taxpayer-subsidised loan given to Nest of £387m