Should the auto enrolment minimum contributions be raised?
Calls for the minimum contribution levels to increase to at least 12% have been made by the Pensions and Lifetime Savings Association, who despite agreeing that a noticeable improvement will be made to retirement benefits, some 13 million or so are still at risk of saving too little and would need to make higher contributions and/or work longer to achieve the Pension Commission’s target income replacement rate of 67%. Of these, the so called Generation X (of which I am one!) were found to be the most affected as few had saved during their early careers and those that did, only contributed at the lowest rates possible.
Whilst the move can only have a positive impact upon financial outcomes for those individuals, some organisations have urged that more time is needed otherwise it could discourage support from employees and employers who would struggle to find the extra monies required. They have suggested that the current contribution structure be allowed time to bed in before changes are introduced.
Having said that, there has also been much success with the new initiative. Auto enrolment increased pension savings by £2.5bn a year to April 2015 (and is believed to have increased even further at the time of writing) as a direct factor of a large increase in pension membership. Auto enrolment increased participation among those eligible so that by April 2015, 88% of all private sector employees were members of a workplace pension scheme (up from around half of these employees before auto enrolment). In 2012 there were around 5.4m private sector employees who were members of a workplace pension scheme although by 2015 this had increased to 10.0m (of whom 4.4 million were as a direct result of auto enrolment).
Blissfully unaware?
A recent survey of over 3,000 pension scheme members by the Money Advice Service has indicated that most pension scheme members are unaware of the
level of contributions that their employer pays into their defined contribution pot. More alarmingly, it seems that 43% are unable to confirm the level of their own contributions whilst a third do not know the name of their pension provider. This all comes despite the increasing levels of information made available to them.
Without this knowledge, many making life changing decisions can expose them to risk as their decisions may be irreversible. This may signify a need to change the communication methods employed, although from what we have seen, there may be little scope to do so.
Leaves on the line?
Whilst those in the South are struggling with their rail journeys, it is not all plain sailing for those in the pensions industry. HMRC has admitted that files submitted via the GMP Scheme Reconciliation Service in November 2016 would not be acknowledged until March 2017 at the earliest, with any response to queries raised not being addressed until June 2017.
This backlog could lead to many problems such as reputational damage for the industry and higher costs for schemes as administrators struggle with inaccurate GMP data. The knock-on effect of the delays means that members may be paid incorrect benefits or pension increases which will take further time and money to rectify.
At the time of writing, HMRC has not provided any indication as to how it intends to improve the service it provides so this may run for many months more.
Changes
The funding deficit of the UK’s defined benefit schemes dropped almost 30% to £195bn in November, according to the Pension Protection Fund. Driven by rising gilt yields, the impact of changes to actuarial assumptions and the new Purple Book dataset, there was an £81bn fall compared to October. There was a corresponding improvement in the funding ratio of 88.1% for November as opposed to 84.1% at the end of October.
Total assets fell by 1.2% over November to £1.4trn whilst total liabilities decreased by 5.7% to £1.6trn, hence the improvement.
David Deidun
david.deidun@quantumadvisory.co.uk