Make adequacy the focus of AE Pensions Review says IFOA

The Institute and Faculty of Actuaries (IFoA) has today issued its response to the Department for Work and Pensions (DWP)’s wide-ranging review of automatic enrolment (AE). In it the IFoA makes a number of recommendations, including:

1. That adequacy of retirement savings should be at the heart of the review, as it is essential that people save enough to meet all of their retirement income needs.
2. That adequacy could be improved by employers rewarding saving over the minimum contribution rate in some way, and introducing a method of auto-escalation akin to ‘Save for Tomorrow’.
3. That DWP considers reducing the earnings trigger once maximum contributions are payable across all employers, to strike a balance between the ability for those on lower incomes to save, with the risk of them losing out on tax relief and employer contributions.
4. That this must be accompanied with information on State benefit entitlement.

The response also calls upon DWP to remove the AE age criteria for a number of reasons, namely that, regardless of age, entry in to the workforce is a crucial point for engaging individuals with saving towards their retirement. Additionally, the sooner individuals begin to save for a pension, the greater opportunity there is for the savings to benefit from investment returns. Finally, this would align with other Government’s initiatives, such as the recruitment and retention of older workers as it would provide an additional financial incentive to continuing employment.

Worryingly, AE policy could result in a reduction of contributions to pensions by employers. Currently, by the time the contribution level has reached 8%, the ratio of contribution between the employer and employee will be 3:5. IFoA members’ experience is that most larger occupational pension schemes have a ratio of at least 1:1, with many employers offering a greater proportion of the contribution.  To address the reduction in the statutory ratio of contribution the IFoA believes that individuals who opt to save greater amounts than the minimum could be rewarded with greater employer contributions.

Colin Wilson, President of the Institute and Faculty of Actuaries said: “The IFoA has first-hand knowledge of the impact of AE Pensions, and of the wider issues surrounding pensions adequacy in the UK. We recently conducted a survey in which a worrying 42% of respondents said that they had done nothing to prepare for their retirement. This is clearly unsustainable, and we therefore call upon the Government to do everything they can to ensure that everyone who retires in the UK does so with adequate provision for their old age.

“Government, pension providers, employees and employers all have a role to play, and that is why our submission to the review of AE contains recommendations to allow maximal contributions,  opportunity to benefit from investment returns, and access to pensions tax relief.

“The demographic trend towards an aging population means that this issue will only become more acute with time. Improving the adequacy of retirement savings is an achievable goal, and our recommendations detail the methods that DWP could use to ensure that all savers are able to save effectively for their old age.”