Automatic enrolment review must focus on ‘more than just contributions’, says expert

Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, was commenting as numerous industry bodies called on the government not to increase contribution rates above a planned 8% of earnings as part of the 2017 review.

Barton, a pensions law expert, said that the review would give the government “an opportunity to look back at what has worked, what has not and what we could do better”.

“The auto-enrolment rules have now become the starting point for workplace pensions in the UK,” he said.

“Despite some helpful easements there is still too much complexity in the detail, and still work to do in linking the system of workplace pensions to the wider savings and retirement options now out there,” he said.

The Department for Work and Pensions (DWP) told the Financial Times, which published calls to defer contribution increases from the likes of the Association of British Insurers (ABI) and Confederation of British Industry (CBI) last week, that it was “still in the early stages of scoping” the review and was “working closely with the pensions sector” to establish what it would cover.

The minimum contribution that must be made to a workplace pension by both the employer and the employee once automatic enrolment has taken place will be phased in, rising to a minimum total contribution of 8% of earnings by April 2019. Of this, a minimum of 3% will have to be contributed by the employer. The current minimum contribution is 2%, of which 1% must come from the employer.

However, experts have warned that saving 8% of earnings will simply not be sufficient if the majority of individuals are to have enough to live on in retirement. For example Lord Hutton, whose 2011 report on public sector pensions led to fundamental reform of the system, has suggested that workers should be putting away at least 15% of their income, or almost double that provided for by automatic enrolment. The 8% figure is far lower than the proportion of salary paid into pensions in the 1970s and 1980s, when defined benefit schemes were more popular, according to research published by Redington, the consultancy, last year.

Automatic enrolment began for the largest employers in October 2012, and will ultimately result in up to 10 million people saving more towards their retirement or saving for the first time. Under the programme, employers will have to automatically enrol their workers into a defined contribution (DC) pension scheme which meets certain minimum requirements, and will be legally obliged to make contributions towards the pensions of workers that do not opt out of the scheme once enrolled.

‘Staging dates’ by which smaller companies will have to begin automatic enrolment run until 2018, and the vast majority of those left to do so are so-called ‘micro’ employers with four employees or fewer, according to the Pensions Regulator’s latest annual report on automatic enrolment. Of those who spoke to the Financial Times about delaying contribution increases, most said that it was better to do so until the programme was complete.

Graham Vidler of the Pensions and Lifetime Savings Association, which represents 1,300 workplace pension schemes with £900 billion of assets under management, told the newspaper that it would be “very difficult to reach conclusions” about whether higher minimum contribution rates were discouraging workers from saving altogether before the 8% rate was fully in effect.