"When trust in pensions is at an all time low, one has to ponder about what could happen if auto-enrolment goes wrong," says Atkin & Co.'s Chris Atkin.
Upon seeing another auto-enrolment advert on the television recently, the one with those funny jelly men characters, I started thinking more about auto-enrolment and how it will 'play-out' in the future. I know, it's the question we've all been asking ourselves for some time!
The most important item to consider is the pension that will be provided to members through auto-enrolment. If the members feel that they have received value for money, great, if not…well I'm in little doubt that there will be consequences.
In the past, members of a defined benefit (DB) scheme have retired with pensions between £12,000 and £15,000 per annum on average. Given the contributions intended to be made into auto-enrolment schemes are around 8% and the subsequent annuity charges that will follow, it is not too far fetched to assume that an individual is likely to accrue a pension at retirement of between £3,000 and £4,500 per annum at best. But probably a lot lower in the current climate!
Under the current state pension regime, if this pension were added to the state pension it is likely to exceed an amount required to qualify for existing means-tested benefits. But with how much extra? If it were not for the Government's proposal in January 2013 to adopt a flat rate pension from 2017, a member may have looked back and questioned whether it was really in their best interest to contribute via auto-enrolment. I realise that the alternative is a greater reliance on the state, and this opens a completely new window for discussion, but the member could have raised a valid point.
Given the Department for Work and Pensions' (DWP) advertising campaign and the fact that workers are automatically enrolled into a workplace savings scheme, it would be difficult to argue with a worker if they were to claim that they had been advised to join a scheme.
Television campaigns are continuously highlighting members' need to save for their retirement, theirs and their employer obligations and the staging times - but there is little effort to highlight to the public the level of pension that they are likely to receive given current contribution rates. It is obvious that creating awareness of this is not really going to help people 'buy-in' to auto-enrolment.
The only realistic way to save for a reasonable pension in retirement via auto-enrolment will be to increase the contribution rates in the future. All those in the industry know that a 'typical' member who contributes to auto-enrolment at the existing contribution rates is not going to accrue a pension anywhere near the existing levels. Given the low public confidence in pensions, which was widely commented on in 2012 following the National Association of Pension Funds (NAPF) survey, I'm not sure how the public - including employers - will react later to being told that the contribution rates are going to increase.
If we want to rebuild trust in pensions, surely greater education needs to be provided and we cannot just continue to bombard the public with changes to pensions, it is human nature to prefer stability.
Whilst the public has a lack of trust in pensions, it appears the government and industry may also be suffering from a lack of trust in the public. What other reason is there for not more widely highlighting the true costs of providing a pension and this change in terminology from the word pension to retirement-pot?
There are many possible bumps in the road ahead for auto-enrolment. If it's not 'means testing' there are many other examples to consider, such as what happens when two lifelong colleagues contribute the same, but end up with different pensions at retirement. Surely one member is going to complain! Or what happens if one of the providers of auto-enrolment is found to have, shall we say, irregularities?
When trust in pensions is at an all time low, one has to ponder about what could happen if auto-enrolment goes wrong. Will the public's trust in pensions be irrecoverable? Unfortunately, we as a society have got into a situation where the state has little option but to force people to save for their own good. Given that 11 million people are expected to be auto-enrolled, is it possible that we could be looking at largest ever mis-selling scandal?
Written by Chris Atkin, managing director, Atkin & Co.
Chris.Atkin@atkin.uk.com
