Automatic enrolment 

DWP review chair flags his biggest auto-enrolment risk

DWP review chair flags his biggest auto-enrolment risk

Continuing to simply rely on auto-enrolment's power of inertia has been branded a "high-risk strategy" by the man heading up the department for work and pension's advisory board.

Jamie Jenkins, head of pension strategy at Standard Life, and chairman of the DWP's external advisory group, which supported the government's auto-enrolment review, told FTAdviser that low opt-out rates shouldn’t be taken for granted, especially with this year's increase in contributions.

He said: "Instead, we [should] spend time working with employers and their advisers setting expectations for employees of what lies ahead.

"Some say we should simply continue to rely on the power of inertia, but I think that has limits, and feels like a high-risk strategy."

Introduced in 2012, auto-enrolment has now reached nine million people, and contributions are currently set at 2 per cent, split evenly between employer and employee.

From April 2018, the minimum total contribution will increase to 5 per cent, with the employee paying 3 per cent.

One year later, it will increase again to 8 per cent, with the worker paying 5 per cent.

Mr Jenkins said: "This is a hugely important step. So far, opt out rates have been little more than 10 per cent.

"But for many people on lower incomes, the £10 or so they are giving up each month will increase to £30.

"In the absence of meaningful pay increases, this is a significant additional expense for many people and may represent a more important sacrifice each month to maintain its affordability."

The DWP published its review of auto-enrolment on 18 December, where it announced that the minimum age for workers to be included into workplace pension schemes will be reduced from 22 to 18-years-old, and that it will change the way pension contributions are calculated by mid 2020s.

Mr Jenkins believes, however, that auto-enrolment's first five years have been "an unparalleled policy success," with nearly all employers having set up a workplace pension and approaching 10 million people enrolled.

He said: "The great nudge experiment continues to progress."

Mr Jenkins compared auto-enrolment with stakeholder pension schemes, which were introduced by the government in 2001 as a consequence of the Welfare Reform and Pensions Act 1999.

These plans were designed for people without access to employer sponsored pension arrangements, targeting those earning between £10,000 and £20,000 per year.

The schemes were also required to meet a number of conditions set out in legislation, including a cap on charges, low minimum contributions, and flexibility in relation to stopping and starting contributions.

Mr Jenkins said: "Imagine where we would be now if we had got it right first time, adding 10 to 15 years worth of savings to many of the auto-enrolees of today?

"Sadly, most workplace stakeholder schemes remained largely empty."

All eyes will be on Esther McVey, MP for Tatton in Cheshire, who was last night (8 January) appointed secretary of state for work and pensions, replacing David Gauke, who moves to the justice department, for any changes she will seek to make.