PensionsJan 30 2018

Advocate: Should AE contribution increases be accelerated further?

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Advocate: Should AE contribution increases be accelerated further?

This month's question: Should planned auto-enrolment contribution rises be accelerated to encourage greater saving?

Yes

Nick McBreen, adviser at Worldwide Financial Planning

Historically in the UK, pension planning – or rather the lack of it – has been an issue for policymakers and the end consumer, but auto-enrolment has made a positive start on getting employers and their employees to bite the bullet and make a start on saving for retirement. The steps are now in place but these are not enough.

The run-up to, and launch of, auto-enrolment in the UK has created so many differing opinions and comments, but these for the most part have been around costs and charges and process and functionality, rather than the real story.

Employers have the chance to help their workforce plan for the future and create a positive working environment for them, and just maybe this will reap dividends in terms of increased productivity.

Employees have the chance to control their own financial destiny and not end up relying upon a rapidly disappearing state pension. Auto-enrolment in its current state is a step in the right direction, but this isn’t going to solve the problem. We need to get serious and increase the amount being contributed more quickly.

We should all recognise what an important fundamental change this is and try to build on this foundation to encourage and incentivise everybody involved to take it seriously and start making substantial contributions and plan for the future.

Hindsight is no good when people reach the age when they want to or have to stop work, so action is needed right now.

 

No

Paul Lindfield, director of wealth management at Sedulo

Quite simply, no. There are only 15 months remaining until planned total contributions rise to 8 per cent, in April 2019. It would not add any real impact on workers’ total pension pots over the long term, and would only serve to upset the planned natural order for workers and employees.

Auto-enrolment has been designed with ‘no barriers to entry’ for workers, meaning they only have to think of opting in or out. The process ultimately takes advantage of the fact that people are inherently lazy when it comes to actioning paperwork, and so opt-out rates are typically very low, at around 8 per cent. 

The majority of our clients have used phased contributions, sometimes with a starting 3 per cent employer contribution, and we have seen opt-out rates as low as 1 to 2 per cent of total workforce. We may start to see secondary opt-out levels increase when planned contributions rise next year.

A better solution would be to raise the total contribution by 1 per cent in 2020, and a further 1 per cent in 2021, so that increases are staggered – and thus not upsetting the natural order – but with a beneficial impact on real long-term pension savings. 

How would this be funded? Well, corporation tax rates are due to fall to 17 per cent, so I would suggest that the additional 2 per cent be funded equally by employer and employee, with both sides benefiting from the respective tax reliefs.