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The Association of British Insurers is calling on government to increase auto-enrolment contributions to 12% by 2032, split evenly between employers and employees. It also wants to see a whole of market solution for small pots implemented in this timeframe.
Auto-enrolment was rolled out from 2012 until 2018, having been conceived in 2004. Ten years since the start of the roll-out, government has not produced a clear plan on how to develop the policy. It committed to some reforms – lowering the minimum age to 18 from 22 and scrapping the lower earnings threshold – after a review in 2017, but since giving a vague timeline of the “mid-2020s”, has not committed to clear next steps.
Meanwhile, the pensions industry is keen to see more money flowing into its products, with broad consensus that the current minimum contributions of a combined 8% is not enough to achieve a good retirement outcome.
Consensus approach needed to tackle adequacy issue
Hannah Gurga, director general at the ABI, said while auto-enrolment has transformed pension saving, the challenge remains to ensure people are saving enough for their retirement.
She said a report published by the ABI today sets out the industry’s thought on how higher contributions can be obtained for the next 10 years.
“We stand ready to work with the government to ensure the next decade of automatic enrolment builds on the proud record of its first 10 years,” she added.
The success of auto-enrolment reflects a long-term plan based on cross-party, industry and employer consensus, said Yvonne Braun, director of policy, long-term savings and protection at the ABI.
“We need the same approach now to determine the future of the policy, ensuring more people are included and are saving enough, with the right level of flexibility,” Braun said.
In a new paper published on Tuesday, the ABI criticised the absence of a roadmap for the next chapter of auto-enrolment, even as five years have passed since its last significant review, and called for contributions of 12% of salary.
“By 2032 we want to see contributions rise to 12%, with either an opt-down or opt-up mechanism. This should be split evenly between employees and employers. Pension saving should start from the age of 18, and be based on the first pound a person earns. The employer and employee link creates strong incentives and should remain,” the paper reads.
“A whole of market solution for small pots should also be implemented in this time, to tackle the current trajectory of 22 million pots by the end of the next decade,” it states.
The self-employed – a group in which pension saving has dropped significantly over the past few years – should have their own system, it adds, which could be based on diverting increased National Insurance Contribution payments.
The call for a 12% minimum, split evenly, was made by the Pensions and Lifetime Savings Association in January and appears to be gaining traction across the industry. Currently, the minimum for employers sits at just 3%, a level which former pensions minister Sir Steve Webb recently dubbed “a joke”, with employees contributing 5% of salary. Industry argues that higher employer contributions would make it more attractive to save in a pension and less attractive to opt out.
“The first 10 years of AE have ensured millions more people will have greater retirement provision; the next 10 years should focus on making sure this provision is adequate,” the ABI said.
Should minimum auto-enrolment contributions rise to 12% over the next 10 years?