Giving evidence to the Work and Pensions committee this morning (March 23), Sue Ferns, senior deputy general secretary of the Prospect Union, said she supports the proposals to increase minimum contribution rates to combat the problem of "inadequate pensions savings".
Currently the minimum auto enrolment contribution to an employee’s pension savings is 8 per cent of qualifying earnings - of which employers must pay at least 3 per cent and the employee the remaining 5 per cent.
“[A contribution rate of 12 per cent] is really the minimum level [to save] for an adequate income in retirement," Ferns said, adding that she would like to see a 2:1 ratio between employers and employees' contributions.
"This is the only way to get to 15 per cent," she said.
“I accept there will be different views on that, but we have to address this problem of people not having adequate pensions.”
Sophia Dimitriadis, senior economist at the International Longevity Centre, agreed, saying minimum contribution rates need to change this decade because there is “such an urgent need”.
Nigel Stanley, chair of Nest’s members’ panel said he did not want to argue against a rapid timetable as he is in favour of it, but admitted the difficulty was getting the political buy-in for it to be a priority.
“You need to build a consensus amongst politicians, employers, and workers, consumers, infrastructure to deal with it,” he said, which can be difficult when there are other things to focus on that are less reliant on consensus.
“This is a big change in the pensions system…but better to start doing it slowly than putting it off because it's too difficult.”
However Christopher Brooks, head of policy at Age UK, said he doubts it can be achieved this decade as it would be really difficult to get employers to accept it.
He said he accepts there is never a good time to do it, but clarity is essential.
“It takes time to build a consensus to make that a reality…that’s why we need a timetable, we need a clear vision of what the government wants to achieve and a timetable for achieving it.”
Ferns added: “This may be ambitious but we need to do this, we need to deliver those results otherwise we will continue to have the problem of inadequate pensions savings for generations to come.”
In January, Conservative MP Richard Holden tabled a private members’ bill in the House of Commons looking to lower the age threshold for auto-enrolment from 22 to 18, and there were rumours that the £10,000 earnings trigger would be scrapped in line with proposals from think tank Onward, with which he had previously worked.
However, the bill, which was published on February 25, restricts itself to the proposals outlined in the government’s 2017 auto-enrolment review.
It proposes expanding auto-enrolment to 18-year-olds and eliminating the lower, qualifying earnings threshold, making earnings pensionable from the first £1 where people are enrolled or have opted in, but makes no mention of the £10,000 trigger.
This is in line with a written statement from Opperman, published earlier in February, confirming the government’s intent to maintain the earnings trigger and the qualifying earnings bands unchanged for 2022-23.
Pensions gap
The amount needed in a pension pot to fund an adequate retirement has recently been called into question, with a governance services provider recently warning that Britons relying on workplace pensions may end up with significantly less than they expected in retirement.
PTL warned that most workplace pension plans were being built based on defined contribution adequacy models that were outdated and overlooking some "major factors".
As a result, the managing director of PTL warned that many more members than previously thought are heading toward retirement with inadequate savings.
Indeed earlier this year Hargreaves Lansdown has found that less than 40 per cent of people are on track to receive a moderate level of income in retirement, as set out by the Pensions and Lifetime Savings Association.
The provider’s new savings and resilience barometer found people were not saving enough to achieve a retirement income of £20,800 a year, for a single person to achieve a moderate standard of living. Whereas a couple would need to save £30,600.
This includes the state pension which can be worth up to £9,340 a year per person.
Do we need a new Pensions Commission?
In a follow-up hearing with the Work and Pensions committee, experts were asked whether a new Pensions Commission is required.
The previous Pensions Commission was set up by the UK government in 2002 to investigate the private pensions landscape. It reported its findings in 2004 and 2005.
The government subsequently brought forward two pensions acts in 2007 and 2008. The latter, which targeted private pensions, introduced an obligation for employers to automatically-enrol their employees into workplace pensions. Automatic enrolment was introduced in 2012.
Responding to a question as to whether a new Pensions Commission was required, Laurie Edmans, a member of the Financial Inclusion Commission, endorsed the idea of another review “as detailed and as forensic as the Pensions Commission”.
“I don’t believe that inertia is, anymore, enough,” he said. “I think that the overall picture shows serious disparities between the pensions expectations of many people, which have not received sufficient attention, and those disparities are aligned with the nature of people’s employment.”
“There is a paradox. Expectations seem to be rising as the overall level of pensions provision falls.”
Conservative MP Nigel Mills, who sits on the committee, questioned the need for another commission.
“Don’t we just need government to make a decision on contribution rates and just decide when we’re going to hit 12 per cent and what the split is, and get on with it?” he asked.
“Yes, is the short answer,” replied LCP partner Steven Taylor. “Certainly the jump to 10 per cent…evidence is people just don’t opt out, so yes, you can achieve the objectives by just ramping up the contribution rates.”
“The question is, is that the desirable thing to do across society? So if you want to get to 12 per cent, to 14 per cent, to 16 per cent, at what point do people actually start opting out, because we can’t take that for granted.”
sally.hickey@ft.com
