The 2012 pensions review – not exactly welcome but so much better than it might have been
It is hard to know how to respond to the review of pensions auto-enrolment published today.
There are some sensible recommendations but two major setbacks – people starting a job will now have to wait three months before they are auto-enrolled into a pension and the threshold at which people are auto-enrolled will be increased by £2,000 so that in future it is linked to the income tax threshold.
So while on balance the review goes backwards, my overwhelming reaction is one of relief as it could have been so much worse. Very strong campaigns were mounted both outside government and across Whitehall to gut the 2012 reform package (I explain the background here), and they have been beaten back. Many people deserve praise for that, including many of those who worked hard to achieve the consensus both in and outside of Whitehall and the pensions community.
If the reactionary voices had been successful in excluding the staff of small businesses and scrapping NEST then that would have been the end of any kind of consensus around the 2012 reforms. There were also many urging the exclusion of older workers from auto-enrolment too. These have also been knocked back.
So while the package going forward after today is not quite as good as it was yesterday, it is still going in the right direction.
Unions should see this as a historic victory. We now have minimum pension contributions to go alongside the minimum wage. Making employers contribute to pensions has been a long union campaign, and our disappointment today at the changes we don’t like, should not stop us proclaiming a victory. Seeing it implemented by a Conservative led coalition only makes it a more profound victory in my book.
There are probably lessons here about effective campaigns, perhaps for another day.
Today’s review balances the bad news with some tentative advances in line with the TUC’s submission.
We have always argued that too many concessions were made to industry lobbying when NEST was designed. There were two particular reforms we urged in our submission.
- An end to the annual cap on contributions
- An end to a ban on transfers in and out
The limit on how much you can contribute in a single year makes life complicated for NEST because it has to have checks and procedures to ensure this does not happen, but it also stops NEST being a suitable choice for employers who have better paid staff who could expect to save more than the £3,600 limit in a year. Even lower paid staff might have one-off contributions they might like to make to a pension after divorce or a bequest. The review agrees with this analysis, but puts off change.
We have two concerns about this limit. First, it has created a great deal of complexity and cost for the set up of NEST. Second, and in the long term more importantly, we are concerned that it will send the wrong message about what constitutes a reasonable ceiling on the pension saving that people need to do. Given that we do understand industry concerns about possible competition as automatic enrolment is introduced and in that period it is important that NEST does continue to focus on its core constituency, we do not recommend any change to the cap in the short run. But we do recommend that it be removed once the staging in of employers is complete, and that Government legislate for this at an early stage.
Making NEST the only pensions scheme from which you can’t transfer your pot to or from another provider is also unhelpful. People can easily have a number of different pension pots, and it makes sense to be able to combine them. And while many migrant workers might well opt-out of building up a pension in their temporary home, many will be auto-enrolled and could end up with a tiny pot stuck in the UK long after returning home.
The review team also accept our argument here, but again without immediate action.
If they move between employers with different pensions schemes, they could easily end up with 11 or more different pension pots on retirement. This is difficult for individuals to deal with and expensive and inefficient for pension providers. But regulation makes moving pensions between one scheme and another very difficult, and few people do so. We believe that for the reforms to be truly effective it will need to be straightforward, indeed the norm, for people to move their pension pot with them as they move employer. We believe that Government and regulators need to review this issue as a matter of some urgency. It is in this context that we believe that NEST should be able to receive transfers in and pay transfers out, but only once automatic enrolment is established and the more general issue of pension transfers has been addressed.
Today could have been disastrous for pensions reform. It hasn’t been, and that’s to be welcomed.
But it could also have been better. So while we should celebrate this historic breakthrough, we need to keep campaigning – not just on the positive parts of today’s review, which at least some parts of government may want to quietly forget, but also for more fundamental change. The biggest issue remain the level of contributions. few are going to build up that big a pension from eight per cent of a band of earnings. We need both higher contribution levels and – as in alsmot every other employer backed pension – contributions from the first pound.