Auto-enrolment has forced many employees, supported by their employers, to begin saving for their retirement. More than 200,000 employers have fulfilled their duties, but this is only the start, and we are now well into smaller employers with fewer than 30 staff, where the enthusiasm is somewhat less.
There is no doubt it has had an effect on the savings market, with a lot of activity, additional investments and yet more legislation to address perceived loopholes that are being exploited by the industry (the charge cap) or to make pensions more attractive (pension freedoms).
But auto-enrolment is only another version of 'compulsory' saving that we have seen before. The state pension in all its versions, along with being able to make membership of trust-based schemes a condition of employment, have both been successful, while stakeholder pensions were not.
However, have any of these really addressed the core problem, which I feel is: understanding?Knowledge is still power. Employees need to understand more about retirement and be taught simple concepts. The government is going to pay about £8,000 a year once a person reaches the ever-rising state pension age. Some find this sufficient, but for many it will not provide for what they regard as the necessities of life.
Having been advising employers and employees on the need for retirement planning since 1978, I have spoken to hundreds individually and communicated with thousands through booklets and announcements.
The only approach that really works is face-to-face, when it is necessary to reduce the complexity of pension legislation to a few simple concepts that are very generic, but experience has shown they are understood and remembered.
The word “pension” is boring and for many it is too far in the future for them to want to give it much thought.
Someone once said that hearing it said resulted in "Mego" (my eyes glaze over). What is not in any doubt is that the state is cutting back on benefits, so individuals need to save more if they want to have a comfortable retirement. Few appreciate how much they need to save, something not helped by the regulations the pensions industry has to adhere to, but you cannot plan unless you understand the concepts of retirement. So what are the most basic concepts?
It is quite simple: when we work we get paid by our employer and when we retire we pay ourselves. So we need to put aside enough to pay ourselves. But for how long?
Many of us who are 40-plus have parents who survived into their 70s. We need to understand that this has changed and on average both men and women will now live well into their 80s. So let us say that we survive 20 years after our individual state pension age, adapting as we go along if there are breakthroughs in medical science that increase our lifespan.
Everyone will have their own view, but mine is half of pre-retirement income. On reaching state pension age you stop paying national insurance and pension contributions, you also save on work expenses such as travel, clothes and food and, hopefully, any mortgage has been paid off. For many these equate to about half of our pre-retirement income, hence this target.
The new state pension is roughly £8,000 per annum. So if your pre-retirement salary was £24,000, then half is £12,000 of which you are already going to get £8,000 from the state. You need to save enough to provide an income of the other £4,000 for the expected 20-year lifespan. That means you need a fund of £80,000 at state pension age to pay yourself for that period. If your salary is higher, then the amount you have to save is greater, because the state pension is flat, apart from annual inflationary increases.
There is no point saying to an employee that they need to save 5 per cent of their salary if they are not sure what this means in practice, and then find that they cannot save the money anyway. A barrage of recent reports demonstrating how meagre the nation’s savings are proves just how difficult it is to provide for today while planning for tomorrow.
So how do you make provision for your later life? Start with what is affordable. The government selected 1 per cent as the auto-enrolment minimum because it has little impact on take-home pay. This rises in April 2018 to 3 per cent and it will be interesting to see if this is paid without concern.
It then rises again 12 months later to 5 per cent from the individual, at which point the employer will be adding 3 per cent, giving a total of 8 per cent. But is that enough? It is still short of the 12 per cent figure that has been discussed in the past and less than the comparable figure in Australia of 9.5 per cent, paid solely by the employer.
We all need to live for today and plan for tomorrow. When we are young, a social life, holidays, a smartphone and saving for a house, are more important than saving for an event that might happen in 40 years’ time.
Our priorities change as we find a partner and have children, which in turn increases our costs at a time when one partner’s income reduces. At this point, the emphasis should be on the present, with retirement still 30 years away. We really begin to think about pensions in our 40s.
So, after three years, is auto-enrolment the right answer? I certainly feel compulsion is essential, which is now helped by the pension freedoms introduced in April 2015. The Association of British Insurers (ABI) has reported that there have been 300,000 lump sum payments under pension freedoms, the average figure being £14,500. Sadly it is clear that some have taken cash from a tax-free environment and moved it into a taxed environment, which re-emphasises the need for education.
While auto-enrolment has been a positive, the constant legislation and publicity have been counter-productive. Nobody likes change and we constantly find employees who feel that pensions are too complex and difficult to understand, whereas buying a house and using that as a pension fund is seen as easy and regulation free.
The industry needs a period without political interference in pensions, and could have done without the distraction of the government’s proposed Lisa, which will muddy the waters further. As the public is confused now, do we really need more choice?
It will require more time in education, and explanation in plain English, which will then need to be adapted to reflect our multi-cultural society. The key is to leave the employees with simple messages they can refer to as they go through life.
Brian Smyth is head of Ascot Lloyd Benefit Solutions
Key points
Auto-enrolment has had an effect on the savings market.
Few appreciate how much they need to save.
The industry needs a period without political interference in pensions.
