Government needs to ensure automatic enrolment provides adequate savings in retirement

In its response to the Work and Pensions Select Committee’s inquiry on automatic enrolment (AE), the Institute and Faculty of Actuaries (IFoA) makes three key recommendations for the Government to build on the success of AE to-date to increase the numbers of people saving into a pension:

• It is vital to undertake a holistic analysis of the pension landscape, and what it means for current and future pensioners, due to the recent pension reforms to ensure it’s fit for purpose in helping individuals achieve an adequate income throughout their retirement.
• Close monitoring of SMEs, and in particular micro-employers, to address any problems identified with AE take-up will help ensure SMEs successfully enrol their employees.
• With minimum contribution rates set to reach 8% by 2019, the Government must determine whether this level of saving is adequate, and identify any groups that are at risk of a “savings gap”, to reduce the risk of individuals not saving enough to meet their needs in retirement.

Nick Salter, Immediate Past President of the IFoA, comments:

“While it is good news that auto enrolment is increasing the number of people saving into a pension, it is important that the pensions framework, including any potential tax changes, as a whole supports individuals in achieving an adequate income that lasts for the duration of their retirement.  This is especially important because people tend to underestimate how long they will live.  One of the key challenges for individuals will be understanding the implications of this longevity risk, and that, without support to do so, they may become unable to meet their financial needs in retirement.

“We also urge the Government not to delay raising the minimum contribution level to 8% past April 2019, because the Government risks causing confusion amongst members whose schemes have already sent out communications about planned increases.  It is also important that workers start to build up the level of pension savings they will need for an adequate income in retirement.

“While AE is clearly a positive development, it only addresses part of the broader challenge of promoting the adequacy of retirement income. There is an inherent tension between the passive behaviours from individuals required to make the AE reforms a success, and the active behaviours that individuals need to have to take advantage of the pension freedoms.  We would urge the Work and Pensions Select Committee to explore this tension and potential repercussions during its inquiry.

“In addition, AE does not capture all of the working population.  The self-employed and many low-paid workers, including those with multiple low-paid jobs, will not benefit from AE. It is important these groups are not ignored and consideration is given to how these groups might be motivated to save for their retirement.”

The IFoA’s full response can be viewed here.

About the Institute and Faculty of Actuaries

The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body.

Research undertaken by the IFoA is not commercial.  As a learned society, research helps us to fulfil our royal charter requirements to further actuarial science and serve the public interest. 

Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.

Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.

Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.

The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.