The final phase of auto-enrolment contribution increases has just kicked in. For the industry this has been a huge success, bringing over 10 million workers into long term savings for the first time. Yet we all know the total 8 per cent of band earnings employees will be paying is nowhere near enough to provide a decent retirement.
There is a constant chorus from industry ‘experts’ calling for yet higher contribution levels, but I wonder how many of them have any understanding of what it is like to live on the national average wage? I believe we need to come up with smarter solutions to this problem and that the tools to do so already exist.
For someone living on national average earnings post April’s increase, auto-enrolment contributions will consume over 20 per cent of disposable income.
Let’s look at the numbers. The national average UK salary is £29,009. Allowing for banded earnings, the new minimum monthly AE pension contribution from 6 April, will be £76 per month. Allowing for an average disposable income of £371 per month, according to research from Opinium conducted in January, the new pension contributions could represent 20 per cent of an average worker’s disposable income, which is well up from 12 per cent in March.
In just thirteen months auto enrolment payments have gone from 0.8 per cent of salary to 4 per cent, assuming basic rate tax relief. This is a five-fold increase and now represents over £1 in every £5 of their disposable income. How many people will look at their payslip at the end of the month and note the amount deducted keeps growing?
The additional revenue this will bring to pension providers is huge, but as a consequence shouldn’t they do more to help employees manage their money so these increased pension contributions are affordable? If people are not given more help, these increases could be the final straw in workers deciding to opt-out.
Conveniently, Government has substantially masked the impact by adjusting minimum wages and tax allowances in the same month. The minimum wage will increase by 4.9 per cent to £8.21 per hour, accompanied by a £650 increase in personal allowances. Arguably this is a classic implementation of Benartzi and Thaler’s Save More Tomorrow approach of redirecting part of a pay rise to pension, but I thought it was supposed to be a voluntary thing. This is essentially Save More Tomorrow by stealth. Essentially Government is giving with one hand and the pension industry is largely taking it back with another.
Higher overall blanket contribution levels are not the answer. Where would they stop? Some have suggested AE contributions should rise to 13 per cent. If this were to be split 8 per cent from the member and 5 per cent from the employer that would mean 31 per cent of disposable income for those on national average earnings.
Are people really going to put nearly a third of their disposable income into pensions as a regular monthly outgoing? At what point will consumers decide the promise of a pension tomorrow is not worth the pain today. We must remember behavioural finance teaches us that consumers discount the perceived value of an income in 20 years’ time by half.
It is time for fresh thinking in helping consumers save and there are lessons to learn from the success of emerging fintech micro- savings services. In just a couple of years a number of these services have assisted hundreds of thousands of customers to save modest amounts when they feel they can afford it.
Equally many personal financial management tools can now use AI to nudge consumers when there are opportunities for them to reduce monthly expenditure. If we can show consumers where they can save money from their regular outgoings, we can then encourage them to redirect some or all of the savings to their pension fund. There is no shortage of fintech solutions that auto enrolment providers could embrace to make savings easier, but seeking ever larger fixed contributions will eventually backfire.
Constantly demanding ever higher contribution limits is just lazy and runs the very real risk that sooner or later consumers will decide it is not worth the effort.
It is time for the industry to step up and do more than just take money from people. Lots of methods exist – we just need to embrace them.