Why it’s good to keep talking about auto-enrolment reforms

At the start of this year, while much of the nation was packing away its Christmas decorations, a ‘Private Member’s Bill’ was launched in Parliament. This reignited the debate around reforming auto-enrolment.

Richard Holden, the Conservative MP for North West Durham, outlined his proposal for helping younger workers save for their retirement. His is an unusual Bill because it consists almost entirely of things that the government committed itself to in 2017, following the publication of the ‘Automatic Enrolment Review’, but has yet to set a timetable for.

Auto-enrolment has been one of the most successful policies of the last 10 years, bringing more than 10 million people into workplace pension saving. According to figures from the Department for Work and Pensions, auto-enrolment currently adds an additional £28.5bn to the UK’s retirement savings every year. But it could be improved further to make sure it reaches its full potential. That means widening it, so it benefits younger workers, women and people from ethnic minorities.

The Bill focuses on widening the policy to workers over the age of 18 and increasing the proportion of earnings that people save. Currently, people between the age of 18 and 21 are not automatically enrolled into a workplace pension. Although many can opt into pension saving, many don’t and miss out on the employer pension contributions they are entitled to as a result.

Why reform of auto-enrolment is needed

Lowering the age at which people are automatically enrolled from 22 to 18 makes sense for 2 reasons:

  1. First, if people start saving earlier then they could retire earlier.
  2. Second, 22 is a legacy from a time when the age for pension saving through auto-enrolment was the same as the age people were entitled to the full rate of the National Minimum Wage. The rules for the minimum wage got changed but not the rules for pension saving. Tidying this up is good policy housekeeping.

The Bill, which will go before the House of Commons again in late February, includes a second policy change, also itself a government proposal. In 2017, the ‘Automatic Enrolment Review’ proposed scrapping the lower earnings threshold. This means that pension contributions would count from the first pound earned rather than the current threshold of £6,240.

The Pensions Minister, Guy Opperman, reaffirmed the government’s commitment to implementing these reforms with a target date of the ‘middle of the decade’ often being floated. This measure will dramatically increase the pension saving of people in part-time work, younger workers and others in low-paid jobs.

Reform timetable must consider wider economic circumstances

While we’ve consistently called on the government to set a timeline for the introduction of the already promised proposals, we do understand that changes such as these cannot happen overnight and should only be implemented once the post-pandemic economic recovery is complete. We are acutely aware of the very real pressures facing millions of households right now as inflation and every day costs continue to rise. And we realise that there must be a ‘right way’ for such proposals to be implemented.

We think that it makes sense to lay the legislative groundwork for these reforms now and then gradually implement them to manage their post-pandemic impact. If this isn’t done, we potentially risk undermining the success of auto-enrolment. The policy was phased in over a period of years and there’s no reason why the same approach cannot be adopted for improvements to auto-enrolment.

Growing workplace pension pots are a recipe for greater government scrutiny

It’s fair to say 2021 was not a vintage year for many things, but for consultations it was a bumper twelve months. A bumper twelve months for consultations – not only in quantity, but in complexity and the operational demands that policymakers intend to make of pension providers.

It would be tempting to imagine this was mere chance and that this level of activity might reduce – but this, I think, would be extremely optimistic. It is unlikely that we have even reached the highest tide of intervention yet.

This is because workplace pensions are starting to become genuinely significant. Not just for the delivery of future income in retirement but also as flows of investment. Government departments other than the Department for Work and Pensions (DWP) are eyeing up what pension funds could be used to achieve. So far, we have seen a tentative move to encourage pension funds to increase their investments in infrastructure by amending rules relating to performance fees and the price cap. We’ve also been required to help combat climate change by putting in place processes to identify and mitigate climate risk.

Reforms on the horizon

At the same time, the UK continues to pursue a raft of reforms designed to increase engagement with pensions and the value for money obtained by savers. These reforms could be seen as gradually retro fitting the UK pension system while in-flight. Gradually taking us to the place it would, in an ideal world, have been rational to start from, when designing a mass DC-based pension system more than a decade ago.

These reforms include the continued promise of contribution increases, requirements around annual statements and dashboards, pursuing an efficient system for the consolidation of small pots, and the push for smaller schemes to consolidate unless they can demonstrate that they deliver value for money.
There are many wider government policies which could have some degree of impact on workplace pensions, meaning it is very important that the bigger picture is considered with retirement savers’ needs at the heart of any long-term strategy.

The consequence of not having a longer-term strategy in place is less civil service resource being applied to testing a proposition, and thus a greater likelihood of ill-thought through policies. In the pursuit of the short-term advantage drawn from newspaper headlines, there is every chance a policy designed to achieve something else altogether, may be casually allowed to damage the first objective of pensions – which is to provide retirement income.

The interest of departments other than the DWP in the sums held by pension schemes is unlikely to abate. A consequence of Brexit is historically low flows of foreign direct investment. The long-term consequence of Brexit is also lower government revenues than would otherwise have been the case. Simultaneously, the pressures on the UK government to do more to deliver on net-zero will also increase. This is because there is currently very little substance behind its ambitions to deal with the two main causes of UK carbon emissions and deliver either a full roll out of electric vehicles or to deliver a replacement for the domestic use of natural gas. It’s difficult to predict what it will do if it has to deliver last-minute crash investment programmes.

The growing importance of DC pension pots

We are also inexorably moving towards the time when retiring generations are no longer relying on defined benefit (DB) pensions. This will inevitably mean that defined contribution (DC) pensions will become more salient for individuals as part of their pensions. We already know how powerful the politics of the State Pension are in the UK. The intention behind workplace pensions was that mass DC would become the vital bolt-on to the State Pension. We can suppose that in a similar fashion, mass DC will come to hog the headlines too; unsurprisingly, as for most of the population, the DC pension will become the difference between something better or retirement on the poverty line.

We are not yet at the stage where workplace pensions feature as the centrepiece of electoral platforms. More established workplace DC regimes, like that in Chile, are already there. However, we can already see the forces that will propel us in that direction. 2021 was busy, the rest of the decade will be too.

Landmark anniversaries show how far an industry has come

In 2022, The People’s Pension and auto-enrolment will be 10 years old and we’ve both come a long way in that time.

The People’s Pension now has 5.6 million members and more than £16 billion of assets under management. We’re a core provider in a system which has brought more than 10 million workers in the United Kingdom into pension saving – something that was a dream just a decade ago.

Like many other national workplace pension saving systems, the UK’s auto-enrolment regime is still being refined as it matures. The government has either promised to enact or is considering a range of changes in 2022, which will impact on pension schemes and their members. There are other items which are at the review stage. We also think there are a couple of areas where the government and regulators need to look at how recent rules are being implemented in practice.

Timetable for reforms is needed

The government has promised to change some of the initial auto-enrolment rules to ensure that employees save more towards their retirement. These amendments would lower the age limit for auto-enrolment to 18 and calculate people’s pension contributions from the first pound they earn.
We’re also calling on the government to lower the £10,000 earnings trigger to the lower earnings threshold for National Insurance – of £6,240 – to help 1.3 million more people, the clear majority women, save through auto-enrolment. We hope that during 2022 the government will set out its timeline for making these improvements.

The DWP will also need space in the legislative calendar to pursue another major pension reform. The minister has rightly been pressing workplace pension providers to come up with a low-cost consolidation system for small pots. The outline of such a system is now available. To be made operational, however, it needs the DWP to put in place a statutory framework. Two areas which are not yet ripe for any rule changes but will be under review in 2022, are annual statements and retirement products in workplace schemes.

Learning lessons from abroad

Our wish list for items we would like the government and regulators to look at in 2022 also includes enforcement of value for money and greenwashing investments. The first would, of course, only follow once the government concludes its current work on how to measure it. But the lesson from Australia is that value for money rules only start to have an impact on the market once the pension regulator begins to check that it is being applied rigorously.

Pension schemes are also required to play an important role in combatting climate change. However, without better guidance as to which kinds of investment are genuinely sustainable, there is a risk that competition could drive down standards. Some schemes may be tempted to undertake superficial activity to signal green credentials to customers, where the investment risks releasing increased amounts of carbon in the future.

We look forward to celebrating the two significant anniversaries in 2022, while continuing to work to make the saving experience easier and more attractive for employees.

All DC pensions should be included in proposed value for money framework, urges B&CE following new PPI report

B&CE, provider of The People’s Pension1, has today backed plans for new value for money regulations to be applied to the retail market as well as workplace pensions, following new research from The Pensions Policy Institute (PPI)2.

The PPI’s latest report, What is the impact on member outcomes of different non-capped charging structures?3, looks at the effect that different charging structures could have on pension savers. The research concludes that while average pension savers are neither engaged or motivated by what they are charged, there is a charging gap between members of schemes that are subject to the charge cap and those who are customers of uncapped schemes.

B&CE believes that the intention from The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA), for a new framework to assess value in both workplace and retail pensions, is the right way forward. The leading workplace pension provider believes savers should have a clear idea about how different pension schemes and products compare and, while charges are very important, this should be broader than charges.

Phil Brown, director of policy and external affairs at B&CE, provider of The People’s Pension, said:

“This research shows how significantly charges can impact retirement incomes. With charges generally lower in workplace pensions than in retail, for many people thinking about transferring out of lower cost workplace pensions, it would be better to stay put.

“But value for money is about more than just charges. The FCA and TPR are right to propose a value for money framework that covers all of DC pensions, as savers should be able to examine the value for money offered by both workplace and retail pensions. It will be tough to fine tune, but it will provide real transparency to both professionals and savers.”


New Choices, Big Decisions: Pensions Personalities Revisited

Following on from the most recent study in the series which explores savers’ retirement planning and spending habits after the introduction of pensions freedoms in 2015, this follow-on report looks at the seven personalities in more detail.

The ‘New Choices, Big Decisions’ series explores the evolution of consumer decision making and behaviours under Pension Freedoms – as well as its impact on retirement planning and spending habits. In this latest report, we assess how our brave pension pioneers have been getting on in the five years since new freedoms changed the way people think about their pension money.

The respondents in our research had their own unique priorities, beliefs and preferences, but common themes and traits were also evident across these groups. We revisited seven pension personalities, from the Procrastinating Petes and Paulas, who were overwhelmed by the task at hand, to the I can Do Better Colins and Clares, who’d lost all faith in pensions and would rather have the money in their control.

Five years on, they’re no better informed about the risks they face if they don’t want to buy an annuity. They’ve not been using the time to build the skills needed to make good decisions, nor are they seeking appropriate support. There’s a range of behavioural biases at play which have resulted in them sleepwalking into full retirement with very limited financial plans.

Download our ‘New Choices, Big Decisions: Pension Personalities Revisited’ report

New Choices, Big Decisions – 5 Years On

Five years on from the introduction of Pension Freedoms, new research by The People’s Pension and State Street Global Advisors has shown that mature savers are sleepwalking into retirement. They risk running out of Defined Contribution pension savings and, with a third of their retirement still to come, could spend their later years reliant on the state pension.

In-depth research by consultancy Ignition House explores both retirement planning and spending habits following the introduction of freedoms in 2015. The study reveals that people nearing retirement want their pension provider to supply a safe, guided path into retirement – rather than the complex decisions with which they’re now faced.

The new research centres around interviews with 50 savers and shows how policymakers, and the industry as a whole, have built a system that relies on unrealistic assumptions around how people behave to work effectively.

Key findings include:

  • Savers are scared of planning for the future as they don’t want to discover the ‘truth’
  • Savers also underestimate the financial risk of growing old and don’t understand how inflation can impact their savings
  • The typical saver follows the path of the least resistance – they won’t leave a product or change a drawdown withdrawal rate once they have signed up

Download our ‘New Choices, Big Decisions: 5 Years On’ report

Workplace defaults: better member outcomes

Switching from a pension default fund could cost ‘DIY’ investors up to £247,000.

Our new research with State Street Global Advisors shows that DIY investors risk missing out on up to £247,000 by switching from their workplace pension scheme’s default investment strategy and making their own fund choices instead.

Workplace defaults: better member outcomes reveals the potential cost of 4 of the most common mistakes made by pension savers who choose to be their own investment manager rather than investing in a default fund.

It shows how different savers, who display particular behavioural biases, perform over 4 decades, compared to someone who stays invested in a well-run default fund throughout.

The saver profiles include:

  • Cautious Connor – doesn’t like taking risks so invests in a cash fund
  • Performance chasing Patricia – buys high into a strongly performing fund
  • Eggs in one basket Elliot – fails to diversify his portfolio
  • Forgetful Fiona – is initially an active investor but fails to keep her portfolio under review

The report also focuses on the lack of knowledge around charges paid on pension pots, with almost 8 in 10 (78%) of savers unaware that a fee is taken from their pot1.

Download our ‘Workplace defaults: better member outcomes’ report

1 Source: The FCA Financial Lives Survey found that 78% of defined contribution savers were not aware of charges on their pension.

Response to TPR’s annual commentary and analysis report

Response to TPR’s annual commentary and analysis report

Commenting on TPR’s annual commentary and analysis report, Gregg McClymont, director of policy at The People’s Pension, said: “It’s fantastic to see that a growing number of people in their twenties are saving into a workplace pension thanks to the success of automatic enrolment, but millions of workers are still missing out because they’re too young, work part-time or don’t earn enough.

“While it’s encouraging that as many women as men now saving into a workplace pension, we can’t ignore that women are still significantly worse off than men in retirement and much more needs to be done to address this inequality.

“Lowering the age limit for auto-enrolment to 18; calculating people’s pension contributions from the first pound they earn; and reducing the amount someone needs to earn to be eligible for a pension could put billions more into savers pension pots, bring more women into pension-saving, and help hundreds of thousands of younger workers save towards their future.”