How can advisers build on workplace momentum?

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Auto-enrolment has been a success so far, with more than 540,000 employers auto-enrolling over 7.7 million employees into workplace pension schemes. With a high employer compliance rate and low opt-out rate of 9% it appears that the foundation for getting more people saving is strong. Although the groundwork has been done, we need to continue to build on this by keeping the momentum going and move pension saving away from inertia to engagement, helping people to take personal responsibility and make informed decisions. As we all live longer pension saving must become a habit, not a chore, this is something the adviser community is well-placed to support.

The Department for Work and Pensions (DWP), supported by an  Advisory Group of experts, is currently carrying out a review of automatic enrolment and is expected to report back towards the end of the year - hopefully, managing to avoid being side-tracked by the snap General Election. Following an initial consultation, and ongoing discussions with the pension industry, employers, and other stakeholders, the DWP review team is looking at three broad themes; the coverage of auto-enrolment, engagement, and contributions. In addition, it will consider a wider review of activity, including whether the technical operation of the policy is working as it should, and whether the default fund charge cap, currently set at 0.75%, should be lowered.  

Driving engagement

Auto-enrolment’s success has been down to the Government, regulators, employers, advisers and pension and payroll providers all working together. To be truly successful, we need to encourage more people to save more so they can achieve the retirement income they aspire to. For the vast majority of people, saving at the minimum level of a total of 8% of a band of earnings won’t be enough and will ultimately lead to a disappointing income in retirement, and possibly a government backlash.  We need to help people to understand the value of pension saving, what more they could do and how to do it. Without engagement with pension saving, the success of auto-enrolment will plateau.   

However, driving engagement is far from easy and doesn’t come cheap. Pension providers continually invest in their customer propositions and engagement strategies to try to positively influence saving behaviour. A further reduction in the charge cap could undermine auto-enrolment, cutting into providers’ engagement strategy budgets. It could even lead to some providers exiting the market, potentially limiting the choice for advisers to support employers and their employees.

The government should lead the way by actively promoting the value of pensions and resist from constantly weakening the pension tax rules which creates uncertainty and undermines confidence.  Having more open and honest conversations about the Government’s role and encouraging people to take personal responsibility for their financial futures will help to embed more of a savings culture. With the State Pension Age increasing (depending on the elected party, come June), it is even more important for people to start saving for themselves to ensure they can retire when they want to.

The role of the adviser

Advisers help employers design their pension scheme, making sure it is compliant with the auto-enrolment rules. They can also help employers to do more by taking on an ‘ambassadorial’ role promoting pension saving in the workplace. Good employers, often those encouraged by advisers,  tend to do more than the bare minimum by offering high-quality pension schemes, with higher contributions, including matching, and access to modern online pensions with digital tools, nudges and access to access, guidance, and support.

The auto-enrolment rules are overly complex making AE costly to administer and difficult to communicate. The DWP review is an opportunity to simplify the rules by making pension saving open to all, not just restricted to an exclusive club. The pension freedoms have changed the dynamic of pensions saving, making it in the interests of most people to save in a pension at some time, including people on low incomes. Post roll-out of automatic enrolment, we believe the earnings trigger and contributions bands should be removed. This immediately brings more people into pension saving, while making contributions more meaningful. Furthermore, the minimum age should be reduced from age 22 to 18, and the upper age removed altogether. Saving won’t be right for everyone all the time so we believe employees should retain the right to opt-out. In order to accelerate participation, we believe the time is ripe to reduce the re-enrolment period from three to two years to coincide with the end of phasing from 2019. Employers will need adviser support if the rules are changed to make sure they are still compliant. And this may then lead to more adviser opportunities such as offering advice in the workplace, including pension clinics and seminars as well as face to face advice.    

One consequence of changing employment practices is the growing army of people who are excluded from auto-enrolment, specifically the self-employed. In recent years there has been a fall in pension saving among this group, which the government needs to take urgent steps to reverse, by looking for solutions using similar nudges by using the national insurance framework. I hope this is revisited post-Election, bringing more people into pension saving. In turn, the self-employed will need advice in selecting a pension plan.

Auto-enrolment is increasing pension participation, but there’s still a long way to go to encourage employees to pay the level of contributions needed to meet their retirement aspirations. The DWP review of auto-enrolment has the potential to take pension saving to the next level, moving from inertia to engagement. Advisers are well-placed to work closely with employers to start empowering employees to engage with their pension savings.