One, Three, Five – Stop or carry on?

From April 2019 auto enrolment “comes of age”, the transitional arrangements will be coming to an end and all schemes will be expected to reach the full minimum contribution levels.  The member contributions for any statutory minimum arrangements will go up to 5% of qualifying earnings.  The increase from 1% to 3% from April 2018 has not resulted in an avalanche of opt ours – and I would be optimistic that national inertia will protect enrolment rates for the next step up.

I think you have to view auto enrolment positively.  It has:

• Increased the number of people in pension arrangements;
• Resulted in new low cost pension vehicles who are innovating to cope with the demand;
• Provided national focus on the issue of retirement provision.

However, is it mission accomplished or does it need to go further?  If you map a lifetimes of auto enrolment minimum contributions it does not make great reading for the majority.  The level of contribution is not going to provide a comparable pension to pre retirement income.  In addition, the auto enrolment generation will be entering the property ladder later and are unlikely to be as prepared for retirement with likely no defined benefit history.

The use of Qualifying Earnings is one of the key problems.  For low earners it makes a large proportion of earnings non pensionable.  For high earners, it caps off earnings and doesn’t track salary progression.  I would far prefer basic pay arrangements as a base, with some underpin against percentage of total earnings.

The contributions of circa 8% are also lower than I would like to see.  The sad fact is by mandating at that level the average person on the street is going to feel this is sufficient – as otherwise why was this figure selected?  A good question, to which I don’t know the answer.  There is going to be a lot of disappointing people if they save consistently at this level (especially on Qualifying Earnings) over a lifetime.  The faith in pension provision is going to be tested as people start to take more notice of their projections.

This has come out slightly as a string of consciousness, however every time I think of one thing it points to another.  So, what would I like to see:

• Financial education taught at a base level at schools;
• Contributions mandated at an appropriate level;
• Contributions based on total earnings, or at least a high percentage of it;
• Providers pushed to innovate and improve the offerings.

I doubt we will get it all, but the industry needs to keep asking and pushing for improvement.