92 pages but one clear message: what today’s employers’ pensions survey tells us
The Department for Work and Pensions’ employers’ pension survey published today stretches across 92 pages but there is one clear message apparent to readers: little is going to change regarding the level of UK pension saving without action on automatic enrolment minimum contribution rates.
The report shows that the vast majority of employers are planning to put enough, but no more, into employees’ pension pots than will meet legal requirements. Therefore, if we are to boost savings rates, this is where our attention must be focused.
Automatic enrolment has been rolling out to progressively smaller workplaces since 2012. It requires workers who do not wish to be a member of a pension scheme to opt out and obliges employers to contribute to their retirement savings. Currently total minimum contributions amount to just three per cent of a band of earnings between £5,824 and £42,385, of which one per cent comes from employers. This will rise to eight per cent by April 2019, including three per cent from employers.
These rock-bottom contribution rates are widely acknowledged to be insufficient of achieving a decent standard of living in retirement. This is tacitly acknowledged in the executive summary to this report which begins by noting “Millions of people in the UK are not saving enough for retirement”.
Any hope that the mere introduction of auto-enrolment would lead to a transformation of workplace savings in the UK is undermined by even the most cursory reading of this latest output from the DWP.
Surveying more than 3,000 private sector employers, it found that 62 per cent of those firms that have introduced auto-enrolment are contributing just one per cent of band earnings, and the vast majority will only raise rates in line with the legal minimums. Just 32 per cent contribute more than three per cent.
Among those (typically small firms) yet to be brought into auto-enrolment, only 14 per cent plan to contribute above the legal minimum by 2019.
The minimum contribution rates are particularly influential on the very smallest firms. For instance the DWP report shows that 93 per cent of firms with between 20 and 49 employees plan to stick to the minimum legal contributions rates.
Some might suggest that, with this basic workers provision in place, it is up to workers to top-up to meet their needs. But, we there is no sign of this happening and we shouldn’t be surprised. Real wages are still below pre-recession levels and salary growth appears to be slowing, so few will be feeling flush with spare cash. And the inertia caused by the complexity of the pensions system, its myriad products and charges and the fact that human behaviour tends to prioritise short-term priorities over the long-term, means that voluntary individual top-ups were always an unlikely route to improved retirement provision.
Of course, minimum contribution rates are not the sole tool at our disposal. A recent Pensions Policy Institute report shows the great impact on pension contributions (particularly but not exclusively to low earners) of abolishing the cumbersome system of banded earnings that mean that pension contributions are only paid on a portion of salary.
The TUC also believes that we need to bring more low earners, particularly women, into the pensions system by reforming the arbitrary £10,000 earnings trigger that determines whether someone is eligible for automatic enrolment.
There will be a review of automatic enrolment in 2017. The choices open to the government boil down to leaving automatic enrolment as a reasonably successful way of getting a number of workers a few extra pounds in savings or whether it wants to build on what has been put in place to give the vast majority of workers the opportunity to achieve a decent standard of living in retirement. This requires consensus-building among employers, workers and the government as to the future routemap for pension contributions.