Public Accounts Committee inquiry into Auto-Enrolment will kick off in less than two weeks
19 November 2015
On the face of it Auto-Enrolment (AE) looks like a storming success. The combined forces of the Department of Work & Pensions (DWP), The Pensions Regulator (TPR) and many pension providers and advisers have worked together in a highly effective manner to roll out A-E to large and medium-sized employers. By March 2015, according to the TPR’s numbers, some 5.2m workers were auto-enrolled. A total of 141,000 employers are going through their staging dates during this financial year to March 2016. Opt out rates have been much lower than originally anticipated at around 10%.
That said it is not all good
news. The number being auto-enrolled were almost matched
by the number ruled to be non-eligible for A-E (either
because they are younger than 22, older than State
Pension Age or have annual earnings of less than
£10,000). This means about 25% of the workforce have no
additional retirement savings from auto-enrolment.
Source
: TPR’s monthly declaration of employer compliance
report
However the real test for A-E is yet to
come. Over one million smaller employers have yet to
reach their staging dates. Two thirds of these (66%) are
micro-businesses with 1 to 4 workers and 16% have only 1
employee. It is clear that smaller employers will need
more support to define which employees should be
auto-enrolled; which should be offered an option of
joining and would be eligible for employer contributions
if they did so (those earning between £5,824 and
£10,000); and which do not require employer
contributions but must nevertheless be offered
membership of a pension scheme if they wish to pay by
themselves.
For these companies there will be
scarce internal resources for handling administration
associated with staging and more demands placed on
accountants, book-keepers, payroll bureaux, the pension
providers and TPR to assist them. Some A-E master trust
operators such as Now:Pensions and The People’s Pension
have already pre-empted this upcoming demand by
announcing the imposition of a modest administration fee
alongside a wider range of employer support services.
However NEST itself has decided not to follow
suit. This is despite the fact that the National Audit
Office has declared in a recent report that NEST’s
financing is “inherently uncertain”. It was funded into
existence by a flexible loan from the DWP which now
totals £387m and is expected to grow to almost twice
that figure according to DWP documents released under
Freedom of Information requests. The current state of
their finances is shown in the financial year to March
2015 where NEST generated income of just £18m, while
shouldering costs exceeding £98m. So it’s burning over
£1.5m a week right now and it apparently needs to reach
£20bn of assets under management (AUM) to be
self-sustaining according to its business model. However
at the last count in March 2015 it was a long way short
of that at just £420m AUM.
Other areas behind
the scenes have not quite gone to plan. The pot follows
member proposals which Steve Webb backed in 2014 when he
ran the DWP have been quietly dropped by his successor
Ros Altmann as the department gets to grips with
spending cuts and the roll-out of the new state pension.
Dropping pot follows member from the legislative
programme does not solve the problem of small pension
pots. Automatic enrolment has brought into pensions the
high turnover segments of the labour force that
previously were left out, either because employers chose
not to offer them a pension, or because the employees
didn’t join as they didn’t expect to stay long. Today,
DWP’s modelling reveals people have an average of 11
jobs over their lifetime, and 25% of people will have 14
or more jobs. By 2050 DWP forecast there will be 5
million small pension pots, and many people believe this
is an under-estimate. In the absence of automated
consolidation of pension pots we certainly need to find
another way to help people keep track of all the savings
pots they will be accumulating.
At Dunstan
Thomas we are planning to work with major providers to
pilot a secure online Pensions Dashboard which, if we
get full backing, will automate the process of providing
valuations for paid-up and existing pots all in one
place online. Consumers will be able to assess the total
value of the pension savings they have in A-E schemes
and utilise simple intuitive tools to make retirement
savings decisions based on real total savings. We think
that visibility and transparency are the right way
forward to enable people to make better informed
choices. The hassle of a pensions transfer is avoided if
you can see all your pots in one place.
However,
the issue that may well be most discussed and tested,
when the key protagonists are called before the Public
Accounts Committee for the first oral session on 23rd
November, is whether the pots people are building up
through A-E can provide an adequate retirement income –
for this is surely the ultimate litmus test of success.
What is clear is that minimum contribution levels
will need to move much higher than they are today if
people are to build up pots capable of underpinning a
reasonable quality of life in retirement. Until October
2017 minimum contributions will stay at A-E launch rate
of 1% from the employers and 1% from employees’
qualifying earnings. We then move for one year to a 5%
total before reaching a steady state of 8% in October
2018, split 3% from employers and 5% from employees.
Within a DC pension, the final outcome will be
driven as much by investment returns as by
contributions. The uncertainty of stock markets lend
themselves to stochastic modelling, enabling predictions
to be made of the likelihood of achieving target
outcomes.
The Pensions Policy Institute (PPI)
October 2013 study entitled What level of pension
contribution is needed to obtain adequate retirement
income did just this, and their model assumes an 8%
pension contribution and calculates the probability of
savers reaching the levels of retirement income that had
been declared adequate by the Pensions Commission in the
run up to A-E. PPI found that lower earners paying in
the minimum 8% of band earnings, assuming starting to
save at 22 and retiring at state pension age, would have
a 63% probability of achieving their target retirement
income; whereas median earners have a 49% chance and
higher earners only a 40% chance. These are not great
odds! And what of the 25% of the workforce ruled
ineligible. Will they have to rely completely on the new
state pension for their retirement income?
So Ros Altmann’s appearances in front of the Public
Accounts Committee may mark the first real test for her.
This Committee has teeth and doesn’t give people an easy
ride. I expect they will play back to her the “We’re all
in” mantra, that so successfully headlined the launch
and promotion of A-E, and cite the 5 million left out in
the cold that prove this just wasn’t true. Another chink
in the armour of A-E is the first £5,824 of earnings
that don’t get a pension contribution. The Committee can
hardly fail to notice that this bears more harshly on
low earners than high earners. And part-timers with two
jobs get it knocked off by both employers, so even if
they qualify for A-E they may get no pension on their
first £11,648 of annual earnings.
But expect Ros
to fight back. She has successfully held firm since her
ministerial appointment and resisted clamour for micro
employers to be let-off A-E. She has lent support in
several speeches to industry developing a pensions
dashboard as the alternative to pot follows member. And
she has recently taken up the cudgel for very low
earners who get no tax relief in net pay schemes, even
savaging her own regulator for their inadequate employer
guidance here. It will be an even contest with blows
dealt by both sides, so we should all tune in come 23rd
November to see how she fares.
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