The latest PPI briefing note sets out policy ideas to get people saving. Laura MacPhee explores the merits of the most serious contenders
“People don’t know what retirement is – they haven’t done it before,” said Simon Chinnery.
It may seem an obvious point, but it is an important one. Workers don’t know what to expect in retirement because they have never experienced it, so they can’t easily imagine how much money they will need to sustain a comfortable lifestyle.
Chinnery, who is head of UK defined contribution at J.P. Morgan Asset Management was speaking in the illustrious surroundings of the fund manager’s new offices at the launch of the Pensions Policy Institute (PPI)’s latest briefing note: “Increasing pension saving in the UK”.
There to champion the report was Chris Curry, the PPI’s director. Curry said: “Even though automatic enrolment has been very successful in increasing pension saving, people will need to save more than the minimum levels to have a good chance of having a retirement income they would be happy with”.
PPI analysis has consistently shown that eight per cent is not enough, even though this is the statutory level employers must eventually provide to automatically enrolled savers. Even more worryingly, eight per cent does not really mean eight per cent.
“People will need to save more than the minimum levels to have a good chance of having a retirement income they would be happy with”
“PPI analysis over time has shown that the maximum it gets to is something like 6.9% for someone right at the top of the band earnings,” says Darren Philp, director of policy and market engagement at The People’s Pension. This is clearly inadequate – the PPI has previously said that the replacement ratio a median earner should be targeting is 67%. but what can the government and the industry do to solve the problem?
The PPI report outlined six potential policy changes that might encourage people to save more into their DC arrangements.
· increasing the minimum contributions over time
· higher minimum contributions for median-higher earners
· more voluntary, employer-led approaches like contribution matching
· behavioural economics interventions like the US consumer campaign Save More Tomorrow
· widening the earnings band
· increasing the flexibility of pension pot access.
Chinnery’s choice? Auto-escalation, where the employee’s contribution is automatically increased when he or she gets a pay rise, so will not feel the loss. This is a flexible approach, and the employee can choose to opt out. This system already operates in various companies throughout the US, and has proven broadly successful.
Chinnery gives the example of a large US scheme which had “got to such a level where in fact they were talking about capping it because the members had got up to a really good rate”. Of course, we are very far from that happy situation here in the UK.
“I would sooner them had introduced a higher base rate for auto-enrolment”
So could it work here? United Utilities’ pensions manager Allan Heron gave Pensions Insight his view from the front line. He said: “I would sooner them had introduced a higher base rate for auto-enrolment, but I can understand what the government was trying to do – they were trying to get people in first and then look to encourage them to save more later”.
In the absence of his preferred policy change, Heron thinks auto-escalation could work, provided there was an opt out option. “We know for a fact people are lazy and will just go along with it. It is the cases of people who really can’t afford it who will opt to stay on the current rate”.
Curry says that for auto-escalation to work properly there needs to be engagement, and Chinnery thinks this is “absolutely true”. There is a more fundamental point here, though. If savings into pension schemes are to increase, public confidence in those schemes will have to improve, says Philp.
“People are going to have to trust the vehicles that they’re saving into, and I think there’s still a trust and confidence issue - and a complexity issue - with our pensions that means that there are barriers to individuals wanting to save more,” he adds.
Simplification is the answer, says Philp. Savers need to be able to understand the regulatory system, and there should be “schemes across the piece that deliver value for money, have low, transparent charges, and basically do what they say on the tin”.
This is a sine qua non if the other policy ideas are going to work, but it is important that people keep thinking of new strategies and developing them as the government and industry work out how to clean up the existing system.