A major review into UK pensions adequacy has been shelved amid mounting concerns about loading extra costs on employers, according to media reports.
It had been hoped the review would set a clear timetable for scaling up automatic enrolment minimum contributions and boosting retirement saving among the self-employed.
In early reaction, Catherine Foot, director of Phoenix Insights, said: “Hitting pause on the retirement adequacy review could be hugely detrimental to people’s financial future. In the next five years, the majority of defined contribution pension savers will enter retirement with less income than they expect or need, and this will worsen to a peak in the early 2040s*.
“There are clearly some valid concerns around what increases to auto-enrolment contributions might mean for businesses, but that shouldn’t stop analysis and consensus-building on how and when we address the retirement crisis unfolding before our eyes. Increasing minimum auto-enrolment contributions is one of the biggest levers to tackle undersaving and we cannot afford to delay setting out a plan to incrementally raise contributions.
“The adequacy review is a golden opportunity to look at the retirement landscape as a whole and prevent serious problems for individuals and the state in years to come. With the impending retirement crisis about to unfold, the review should not be kicked into the long grass.”
Phoenix Group also highlighted its analysis of the impact of delaying a rise in minimum auto-enrolment contributions. For a typical 18-year-old, increasing minimum auto-enrolment contributions from 8% to 12% could lead to almost £96k extra in their pension pot (in today’s money terms) at state pension age, equivalent to £64/week. However, delaying this increase by 5 years, reduces the total additional savings potential by nearly £10k. A 10-year delay reduces the additional savings potential by around £22k, and a 15-year delay by £35k
Jamie Fiveash, CEO of Smart Pension, a UK workplace pension provider, said: “We are deeply disappointed to learn the Chancellor has postponed the urgently needed pensions review, which is crucial for securing the UK’s long-term economic stability as well as the financial security of millions of people when they reach retirement.
“When this new Labour Government came to power, it promised to fix the foundations of the country. There is no more foundational issue than our pensions timebomb. With nearly a third of savers set to fall below the minimum retirement living standard, delaying this review risks compounding an already pressing problem. Savers deserve clear leadership, decisive action and a plan to protect their futures.
“We call on the Chancellor to prioritise the second phase of the review in the new year.”
Tom Selby, director of public policy at AJ Bell, said: “Labour has placed ‘fixing the foundations’ of the UK economy front-and-centre of its political strategy and it appears the much-anticipated review into pensions adequacy has fallen victim to this push for growth. Any review of adequacy would have to consider automatic enrolment minimum contributions which, in turn, would have raised the prospect of increasing those contributions and potentially the burden imposed on employers. In the wake of the huge tax hit firms have been forced to wear following the Budget, tackling retirement saving adequacy may be viewed as less of an immediate priority.
“However, the foundations of pensions are also shaky and delaying meaningful action to address these problems will leave millions of people at greater risk of an income shortfall when they reach retirement. There is widespread agreement that the current minimum levels of auto-enrolment contributions are insufficient to deliver good outcomes in later life for most people, yet we still don’t even have a firm timetable for introducing the relatively modest reforms proposed in 2017 – namely applying minimum contributions to the first pound of earnings and reducing the qualifying age from 22 to 18. Furthermore, millions of self-employed workers are not included in auto-enrolment, leaving them at severe risk of having little or nothing saved for their later years.
“In addition, savers face perpetual uncertainty over the way pensions are taxed, with the latest Budget demonstrating the damage fears over potential cuts to retirement savings incentives can have on both consumer behaviour and trust in pensions. It is for exactly this reason that AJ Bell is campaigning for a ‘Pensions Tax Lock’ – a commitment from government not to alter tax relief or tax-free cash entitlements over the long term. If plans to address adequacy are being kicked into the long grass, providing a bit of certainty about pensions taxation feels like the bare minimum the government should do to reassure people.
“Ultimately there may never be an easy time to scale up auto-enrolment, but pushing those difficult decisions back will simply store up problems for the future. Labour now needs to come clean on exactly how it plans to tackle pensions adequacy, which remains one of the most pressing issues facing society and is a potential ticking time bomb if left unaddressed.”
Kate Smith, head of pensions at Aegon, said: “The rumoured delays to the Government’s launch of the second phase of the Pension Review are not only deeply disappointing, but also concerning for many who will be left out in the cold. Most of Britain is currently under saving, and time is running out for many to benefit from higher mandated auto-enrolment contributions, which would help people to build up an adequate income in retirement.
“The second stage of the Pensions Review, looking at the adequacy of pension contributions, was due to start before the upcoming Christmas break. We had expected this to include the implementation of the 2017 review of auto-enrolment recommendations, such as reducing the minimum age from 22 to 18, and removing the £6,240 annual salary offset so pension contributions are made from the first pound earned. Additionally, a timetable for phasing in higher mandated contributions from 8% to 12% of earnings over the next decade was anticipated.
“If these rumours are true, it appears that the political will is fast evaporating, given employers’ reactions to the increase in employers’ National Insurance Contributions from next April. We fully understand that the Government needs to consider trade-offs, but delaying the second phase of the Pension Review risks damaging many people’s financial futures. Other Government initiatives, such as Value for Money and its ‘Scale’ plans may help some, but what matters most is higher pension contributions.”
