full of dreams and a head full of hope began writing about pensions. The pensions press was abuzz with something called “automatic enrolment”, which was due to start in October 2012 – and push a million HR departments towards a nervous breakdown.
A lot has happened in the decade since, but the steady and growing success of auto-enrolment has been a constant. Every cog in the giant wheel of the sector has played a part. From the many pensions ministers, to the trustees and the older employees in offices across the country who urged youngsters not to “opt out”. Even Workie, the DWP’s much derided fluffy monster and “physical embodiment of the workplace pension”, helped nudge the dial and turn around the ailing health of the nation’s old age savings.
Financial services are rarely covered in do-gooding glory so any opportunity to attach their company to something so clearly good is jumped on by chief executives.
And auto-enrolment really has been good hasn’t it? By 2020, roughly eight in ten employees were saving into a company pension, compared to fewer than half in 2012. That bald stat is certainly impressive yet such was the dire situation left after the loss of the major private defined benefit schemes, it is still nowhere near enough to prevent millions from retiring with far too little or, in the case of the very low paid and self-employed, nothing at all.
Guy Opperman, the likable and long-serving pensions minister, was right when he Tweeted last week that the transformation is “off the charts”. That he claimed auto-enrolment’s continued success was his “proudest achievement” is the kind of thing that politicians say, but in this case you get the feeling he really does mean it. But the time for back-patting is over, these are the four things that he, and his successors, need to solve.
Firstly, force us to save even more. Even at 8pc on a band of earnings, the minimum contribution rate remains far too low. A 30-year-old earning £20,000 with 1pc pay rises until their retirement at 67 would only amass around £200,000, assuming 5pc returns after fees. I suspect someone in that position is more likely to use the cash to pay off their mortgage rather than use it to provide an income. Scaled up, that means the majority of people will be reliant on the state pension. The state pension as it currently stands will also not be enough for a half-decent retirement so politicians have a choice: prepare to significantly increase state payments later, or up minimum rates now and share the burden with employers and their staff. The aim should be to replicate the income previous generations have come to expect from DB schemes. After all, most people assume they will be in the same financial position as their parents.
Secondly, expose and combine those small pots. I remember breaking the news that Baroness Ros Altmann had abandoned the “pot follows member” solution in her brief stint as pensions minister. The problem is not going away and while the pensions dashboard will unveil the true extent of the millions of lost savings, it does not necessarily mean they will be amalgamated in the most efficient way.
Thirdly, bring in the excluded. The massive increase in participation from the low-paid has been the cherry on the top of the auto-enrolment cake. However, too many people still have a grand total of £0 in their pots. Those with multiple jobs each under £10,000 a year are a long-identified casualty, as are the self-employed. Covid has rocked the latter – whose numbers have dipped as workers reach for the safety blanket of employment – but around five million people still work for themselves. This is not a technically hard problem to crack and arguments that these workers are all entrepreneurs who need extra financial freedom is folly. Enroll them and let them opt out if they really want to.
Finally – spending it. Mr Opperman says he has plans to address “decumulation in all its forms” including through Nest. This really is urgent now as the first tranche of the auto-enrolled reach their 55th birthday with a few thousands pounds, having never given pensions a second thought.
What’s the point of building up a pension if it’s eaten up by basic tax planning mistakes? Does the Government want people to suddenly become hotshot DIY investors or continue their sleepwalk into some kind of highly regulated drawdown product? It needs to answer this question before it can find
the solution.