Has the government all but ruled out raising minimum auto-enrolment contributions, or could flexible increases be a possibility? The Pensions and Lifetime Savings Association has said it will produce some work on auto-enrolment contribution levels this year, even as it remains unclear when the adequacy part of the government’s Pensions Review will happen. 

 

The Pensions Investment Review was originally to have two parts; the first priority would be investment, but then adequacy would be looked at in a second phase, the government said – until media reports last December suggested that part two had been shelved indefinitely. Pensions minister Torsten Bell dismissed such reports as untrue earlier this month at an event organised by the PLSA but did not say when part two would start.     
 

 

Meanwhile Joanne Gibson, the civil servant heading up the Pensions Review, suggested the government is thinking about adequacy even if part two fails to materialise.  

 

Challenged by the PLSA’s Joe Dabrowski that current levels of pension undersaving would simply come back on the benefits bill in future, she said the debate on how and when to address the topic needed to happen first, and suggested ramping up pension contributions across the board could have unintended consequences. 

 

“We all know we are going to have to do something about contribution rates, but for some people that’s not the right answer,” Gibson said. 

 

 

The government has not provided further details about its plans with regard to adequacy or a timeline. A government spokesperson said: “The interim report of the first phase was published at the Mansion House event on 14 November and the final report will be published in the spring. Government will set out more details on the second phase in due course.” 

The spokesperson remarked that “creating wealth and driving growth is at the heart of our Plan for Change. We are determined to ensure that tomorrow’s pensioners are supported, which is why the government announced the landmark two-stage Pensions Review days after coming into office and why the Pension Schemes Bill was in the King’s Speech.” 

 

It is unclear if the government’s hesitation is partly down to a desire to collect further evidence or policy proposals on how contributions could be increased.

The PLSA is planning some work this year on building flexibility into the auto-enrolment system. It will look at “whether or not it's right for a single contribution rate of 8% or 12% or... whether a more nuanced system might be appropriate”, PLSA director of policy and advocacy, Zoe Alexander, said at the March conference. 

 

What is clear is that there is an overwhelming need to address pensions adequacy. The Institute for Fiscal Studies has suggested that 43% of private sector employees saving in a defined contribution pension are projected to fall below an ‘adequate’ replacement rate as defined by the Pensions Commission.  

 

While the new state pension has helped to address the levels of pensioner poverty seen before 2016 and defined benefit pensions are providing secure incomes for life for many current pensioners – to the point that they are now the least likely age group to live in poverty, while children are the most likely – private pension incomes are undergoing a generational change. Even though it is obvious that most retirees will rely mainly on DC in future, the legal minimum contribution level remains at a paltry 3% of salary from the employer, and only if the employee saves 5%. 

 

The government is loath to increase contribution levels across the board, fearing the impact on employers as well as low earners. Bell said he was “absolutely not dismissive of the question around savings rates” but nonetheless argued that the focus should now be on driving investment returns, rather than contributions. 

 

Last September, the Institute for Fiscal Studies proposed increasing auto-enrolment contributions for those earning above a certain threshold, for example above median income. It also said there was a case for employers making non-contingent contributions and suggested trialling this approach. 

 

 

The pensions industry appears to have come to the conclusion that the only way any government might agree to higher contributions is by lowering the impact on business and consumption today. However, the industry wants to see at least a roadmap from government. 

 

Phil Brown, director of policy at master trust Nest, said minimum contributions may be enough to enable lower earners to achieve a good income in retirement, but for higher earners, it might be necessary to increase contributions over time. 

 

“We are mindful of the impacts this could have on living standards and participation rates. We believe any increase in contributions should be phased in after the removal of the lower earnings limit to guard against the risk of oversaving,” he added. 

 

Reforms to auto-enrolment that would remove the lower earnings limit and reduce the eligible age to 18 from currently 22 have been legislated for, but the work and pensions secretary has not yet implemented or consulted on implementing these. 

 

    

Brown said auto-enrolment, when it was introduced, was helped by having a clear timeline and giving both employers and the market time to prepare. 

 

“It’s sensible to consider how any potential increases could be implemented,” he said, stressing that any changes to auto-enrolment should be seen in the context of overall financial wellbeing, highlighting Nest Insight’s sidecar savings proposal. 

 

Flexibility and simplicity need to be in balance, said Lizzy Holliday, director of policy at master trust Now Pensions. 

 

“On the one hand, undersaving is a significant issue with the potential to impact people’s financial future, but on the other hand it is important to recognise the financial pressures on employers and members,” Holliday said. 

 

She also pointed to the significant gender pensions gap because of career breaks and part-time work as women take on unpaid caring responsibilities, saying part two of the Pensions Review would provide an opportunity to look at this. Former pensions minister Emma Reynolds suggested last year that the gender gap would be considered in the review.  

 

“We think one key output would be a roadmap for the evolution of automatic enrolment policy and delivery – developed in collaboration with employers, members, and schemes – to ensure all key stakeholders are part of building the future together,” Holliday said.  

Is flexibility a requirement if AE contribution levels are to increase?