BLOG: Pensions 2022 – what does the future hold?
The current pace of change in the UK pensions industry is unprecedented. Auto enrolment coupled with the new freedoms afforded to savers in the Budget mean that the pensions landscape in 2022 – ten years on from the introduction of auto enrolment – is likely to look very different to today.
But, while huge progress has been made in pensions policy in recent years, more work remains to be done.
If the goal 10 years from now is for a greater proportion of the population to be saving enough for an adequate retirement, minimum contributions paid under auto enrolment need to be increased and pension saving has to be made more attractive.
The reality is the 8% combined contribution rate won’t provide savers with a decent pension. Before we reach 2022, the big challenge for the government is to raise contributions to between 12 per cent and 15 per cent – or to at least have a plan in place to get contributions close to this level.
Tackling “the 8 per cent question” isn’t going to be easy and it’s likely that any increase will be gradually phased in to ease the burden on employers.
In the interim, the government should look to remove the band of earnings on which auto enrolment contributions are paid.
Most savers are under the illusion that their auto enrolment pension contributions are paid on their entire salary but, the legislation states that employers only have to pay contributions on earnings between £5,772 and £41,865.
This means that no savers actually get an 8 per cent contribution – the most anyone gets is 6.9 per cent if they are exactly at the top of the earnings band, with somebody earning £15,000 only receiving a total contribution of 4.9 per cent which is woefully inadequate.
Removing band earnings and basing contributions on all salary would help boost savings for all and would remove a great deal of the administrative complexity for employers.
But, increasing contributions won’t make any difference if people chose to opt-out of their workplace schemes. At the moment, opt-out levels are low but as contributions increase, so will the temptation to opt-out.
While the Budget reforms will give savers more freedom with their pension pot at retirement, it is my hope that greater flexibility will also be afforded during the lifetime of saving.
In New Zealand, the government’s KiwiSaver workplace pension saving programme, allows savers to make withdrawals to help fund a deposit for their first home or if they are seriously ill or suffering significant financial hardship. In Cyprus, savers in the country’s Provident Funds can, in certain circumstances, apply for loans from their pension fund.
With many young people being deterred from pension saving as they struggle to get a foot on the property ladder, giving greater consideration to initiatives such as these is well worthwhile. Right now, the decade long trend of declining pension saving is being reversed but, there’s no room for complacency and maintaining this momentum is a must.