The future of auto enrolment
Where are we?
Time wise we are well past half way, members wise we are also past half way, employers wise we're just getting started.
As has been well documented already the opt-out rate so far has been pleasingly low resulting in the number of new savers increasing dramatically. Whether or not this will be sustained as more micro employers enrol staff and when the employee contribution increases remains to be see.
So far, so good.
Moving forward I think there are two big questions:
Should membership and contributions become compulsory?
Are the current contribution levels going to be sufficient?
In a resent interview Baroness Ros Altmann (@rosaltmann) did with FT Adviser:
In the interview Ros says that auto enrolment is handing the pension industry millions of new customers, and the responsibility lies with them look after these new clients so they will see the benefit of saving for retirement and look to contribute further for themselves.
As much as this is a sound principle, and the pension industry does need to look after the new entrants to ensure they have a positive experience, I am not convinced this goes far enough. Life is complicated and presents tough choices. It is very difficult to be sufficiently disciplined to sacrifice now for future financial security, especially if you are working on a limited budget.
Firstly, the state pension at some point will have to stop being guaranteed and provided irrespective of financial need. There are currently 4 people in work for every one retired, by 2050 this will have reduced to 2 people. The culmination of this and improved health and life expectancy means the burden will become too great, unless national insurance contributions (or another tax) are dramatically increased there simply won’t be enough money to pay.
With this in mind I think there needs to be mandated savings to fund retirement, without which, for many, retirement may never become a choice.
Secondly, if a person were to commence savings at 22 and work right through to 68 earnings the current average salary of circa £26,500 they would receive total contributions of £97,520. If you then assume an annual return of 5% this would increase to £379,203. Accepting that this doesn’t factor in inflation on either costs or wages, you are looking at an income of around £15,168 per annum.
I appreciate this is a crude calculation and that few careers will look like this, but I would suggest this will prove insufficient to maintain a decent standard of living.
Bringing the two elements together, the gradual reduction of national insurance combined with an increase in pension savings may prove the least painful path to a better standard of living in retirement. What other choices do we have?