The last few weeks have seen a flurry of consultation and call for evidence activity around defined contribution (DC) schemes, bringing together years of discussion, debate and development of ideas.
It is perhaps no surprise, given the current economic climate, that the big policy debates are being driven by improving the efficiency and effectiveness of pensions, so scheme members get more bang for their buck.
In a time of high inflation and severe pressures on the cost of living, this makes perfect sense. In fact, it makes perfect sense at any time. Anything that helps to improve the income and assets available to people in later life is a good thing.
But missing from this current debate is the role of auto-enrolment and discussion about the amount of money being contributed to DC pensions in the first place.
The inertia that drives auto-enrolment is more powerful than we thought
Adequacy of DC pensions has long been a concern but when people are short of income compared to living costs while they are working it can be very difficult to even think about anything that could reduce the take home pay.
That doesn’t mean we shouldn’t still be thinking about it, though, for a number of reasons. We know that, for many, the current levels of contributions to DC pensions even when combined with the state pension are not likely to lead to an adequate income in retirement. And we also know pension policy can take a long time from idea to implementation.
We are learning the inertia that drives auto-enrolment is perhaps more powerful than we thought – despite the cost-of-living pressures, people are not (yet) opting out, ceasing or reducing pension contributions in great numbers. But there is also a lack of financial resilience among many who don’t have short-term savings behind them to help them when income gets tight.
The implementation timetable is still said to be mid-2020s but having everything in place is unlikely before 2030 at the earliest
The government is still, in theory, committed to implementing the recommendations of the 2017 Automatic Enrolment Review, which would bring more people into pension saving by lowering the age of eligibility to 18 from the current age of 22, and would also see the minimum contribution increase to 8% by making pay from the first £1 eligible.
The implementation timetable is still said to be “mid-2020s” but even if the process of legislation were started now that looks optimistic. It is also likely any changes would need to be phased in over time (building on the lessons from the original implementation), so having everything in place is unlikely before 2030 at the earliest, when the economic environment will hopefully be more benign.
This is important as there still seems to be a mismatch between strong spending and weak saving. While this makes perfect sense today, it is not necessarily the right long-term balance, and being able to address that balance when the opportunity arises is important.
Higher contributions could be used to support short-term financial resilience as well
Auto-enrolment has proved to be a very effective vehicle for increasing saving and helping people to adjust their norms and behaviour, recalibrating their disposable income. And it has the potential to do much more, perhaps even using higher contributions to support short-term financial resilience as well.
A more efficient and effective system would be an even more attractive home for higher contributions. Long-term, well planned and evidence-led development of auto-enrolment would be a great way to build on the improvements promised through these consultations.
Chris Curry is director at the Pensions Policy Institute
when Chris refers to “Higher contributions could be used to support short-term financial resilience as well” I understand this to relate to early access to pension funds in particular circumstances. The ‘Auto Enrolment pilot of savings alongside pension contributions is one route – but involves individuals making 2 ‘at source’ contributions, one to the pension, the other to savings. With experience demonstrating that inertia works to maintain contributions, surely one contribution into the pension with the ability to make limited withdrawals, perhaps equivalent to what would have been in a separate savings account, would be more likely to see increased contributions overall?