This blog is partly influenced by a very good talk I attended at this years PBUK conference from Emma Douglas of LGIM called “Exploring the DC Darkside”. Based on that theme, does anyone remember, a long time ago in a galaxy far far away, an evil Chancellor, who has now been deposed, standing up at the 2015 Autumn Statement and Spending Review and making the following announcement?
There would be an extension to the current transitional timetable for auto-enrolment schemes so that the next two increases in the minimum level of contributions payable would be delayed by six months, in order to align these with the following tax years.
As a by the by, HM Treasury stated that this would save the Exchequer £840 million in tax relief but that’s not the point I want to come onto. Maybe like me you parked it at the back of the brain whilst everything else in pensions was going on.
So here we are in July 2016 and the Regulations have just been made that will bring this into force hence brain has now unparked the detail.
Warning, even more techy bit ahead (its ok – stay with me).
As a result of the changes, the transitional periods applying to an occupational or personal DC qualifying scheme will be as follows:
- The first transitional period will run from an employer’s staging date until 5 April 2018 (instead of 30 September 2017, as was originally envisaged). In this period, total contributions must be at least 2% of a jobholder’s qualifying earnings in a relevant pay reference period. Of this amount the employer must contribute at least 1%.
- The second transitional period will run from 6 April 2018 to 5 April 2019 (instead of 30 September 2018). In this period, total contributions must be at least 5% of a jobholder’s qualifying earnings in a relevant pay reference period. Of this amount the employer must contribute at least 2%.
- Finally, once we get to 6 April 2019 the total contributions must equal at least 8% of qualifying earnings, and of this amount the employer must contribute at least 3%.
Techy bit over, relax.
So we get there but just a little later than planned. Is this a big deal? It’s only six months for goodness sake. Yes it is a big deal and this is where I go back to the presentation I mentioned at the start. With full credit to LGIM, the figures that they presented relating to how much you would need to contribute to accumulate a big enough fund for a comfortable retirement income were, I thought, quite staggering.
If one of today’s Millennials/Generation Y DC members wanted to emulate the golden generation with an average DB level retirement income on an average salary at age 65 then they require 25% of salary to be saved during accumulation. Even to provide a low DB equivalent retirement income would require 16% of salary to be saved during accumulation.
So a decent retirement income at a current retirement age requires contributions between 16 – 25% of salary. If this is to be achieved it is clear that contributions should start early and be increased to a level that is affordable and make a difference as soon as can be afforded. Now in the real world 16 – 25% contributions may not be affordable except for the few so a DB equivalent standard is going to be unlikely for the majority. As my colleague Chris Roberts commented in his recent Blog “What’s Your Number?” in relation to how much to contribute “just be comfortable that you have made the informed decision and are funding accordingly”
It is clear that retirement will look different for workers who rely on DC provision – we have seen the headlines in the press about Millennials who think they will never retire. That’s perhaps an extreme too far but even pushing back increases in minimum contribution amount by 6 months makes a difference. Unfortunately not a positive one.