This April saw the first phasing increase to minimum contributions arising from automatic-enrolment. The default minimum contribution for employees rose from 1% to 2% of qualifying earnings, which was greeted by the national media in predictably apocalyptic terms. The Express, for example, warned that “experts fear opt-out rates could surge as cash-strapped workers notice the increased impact on their pay packets”.
Clearly, there is a mindset which regards existing contribution rates as problematic. Unfortunately, however, the perception is that current rates are unacceptably high rather than too low.
While auto-enrolment has, to date, proved a massive success, there is still much to be done before the UK’s workplace pension system is able to offer the prospect of a secure and comfortable retirement for all. The greatest cause for concern remains contribution rates. It is unlikely that 2018’s April rate increase will drive huge numbers of employees out of workplace pension saving. Next April’s adoption of the long-term rates will probably be absorbed comfortably too. However, 8% of qualifying earnings is too low a rate to fund a comfortable retirement. Employers need to recognise this and address the need to pay more than the statutory minimum.
The cost of retirement has played a part in the emergence of a dysfunctional labour market in which older people cannot afford to retire and younger employees struggle to enter the workforce at all. The longer-term interests of the economy demand that older employees are sufficiently secure to be able to leave employment.
For members of defined contribution (DC) arrangements, and this now means all employees within the private sector, long-term contribution rates of at least 15% of salaries will be necessary if this objective is to be achieved. The cost of funding a secure retirement may be high, but the cost to the nation of ignoring the problem will be significantly higher.
Tim Middleton is technical consultant at the Pensions Management Institute (PMI)