Pension providers have criticised the Department for Work & Pensions for ignoring contribution rates in its upcoming auto-enrolment review, calling the issue the "elephant in the room".
The DWP confirmed today (12 December) it would conduct a review of the auto-enrolment system in 2017, publishing a final report towards the end of the year.
The department stated the review would focus on eligibility criteria such as age, earnings and type of employment. It would also review the 0.75 per cent charge cap.
However, DWP confirmed the review would not look at the adequacy of contribution levels, which are currently set to peak at 8 per cent of earnings in 2019.
Pension providers Now: Pensions and Royal London stated this was a mistake.
"The huge elephant in the room is adequacy of contributions and it is disappointing that the review is ignoring this crucial question," Now: Pensions chief executive Morten Nilsson said.
"One of the important lessons we are learning from auto-enrolment is that when government set a minimum level of contribution, that is what nearly everyone ends up paying," he said.
He said there was an "implicit assumption" among both employers and employees that "if government took the trouble to mandate a minimum contribution in legislation, then it must be adequate".
Also calling it the "elephant in the room", Royal London's Steve Webb said 8 per cent was "far below the required level for a decent retirement for most workers".
"This review needs a sense of urgency on this key issue and must come up with plans to get contribution levels up to a more realistic level as soon as possible," the former pensions minister said.
The Trades Union Congress, the peak body of the union movement, also listed adequacy as the top priority.
“Much more money needs to go into workplace pensions if workers are to have a decent standard of living in retirement," TUC general secretary Frances O’Grady said.
"But the government shouldn’t tie its hands by ruling out policy decisions at this stage. We need a long-term plan for ensuring enough money is being saved for workers’ old age,” she said.
But Graham Peacock, managing director of Salvus Master Trust, said raising contribution rates too high would result in much higher opt-out rates.
"Let’s get auto-enrolment working before we start tinkering," he said.
Citizens Advice argued the government's priority should be getting the self-employed saving for retirement, and welcomed its commitment to do so.
"As this is a very complicated area there will be some challenges to overcome but getting the practicalities of extending auto-enrolment right will pay dividends and help huge numbers of people currently shut out of the system,” Citizens Advice chief executive Gillian Guy said.
Scottish Widows likewise welcomed the government's plans to look for ways to bring the self-employed into the auto-enrolment system.
The life company also urged the government to reduce the eligible band of earnings, which is currently £5,824.
Aviva agreed with Now: Pensions and Royal London that contribution levels were "insufficient to deliver a satisfactory income in retirement".
The firm also called for the current age ceiling to be lifted to encourage people to work longer.
On potential changes to the charge cap, AJ Bell senior analyst Tom Selby said: "It’s absolutely critical the government does not rest on its laurels when it comes to auto-enrolment charges.
"The reforms are centred on the idea most people won’t engage with their pensions, so a cap is necessary to ensure savers get value for money.
“However, policymakers need to ensure this does not become a race to the bottom. Charges are clearly part of the picture, but administration and service is also hugely important and comes at a cost.”
Asked to comment on its decision not to review contribution rates, a spokesperson for DWP said: "We know that people need to save more for retirement, which is why contributions will be quadrupling over the coming years and we expect that by 2020 an extra £17bn will be saved a year as a result.”
The DWP will publish the full terms of reference of its auto-enrolment review in the New Year.
james.fernyhough@ft.com
