The ‘leaky bucket’ of inefficiencies within the UK pensions system should be fixed before increasing auto-enrolment (AE) contributions, Hymans Robertson senior DC consultant, James Smith, has suggested.

Debating whether raising AE contributions is key to improving adequacy at retirement at a recent Hymans Robertson conference, Smith said that he is “not averse to increasing contributions”, but that ‘sequencing’ was more important.

“I'd rather build a system that works better and earns trust, before we just arbitrarily put more money in,” he stated.

“Before we ask people to put more [contributions into their AE pots], we need a system that converts every pound saved into a genuine retirement income in the most efficient way possible,” Smith explained.

“Too many savers are pouring money into these buckets, and the real barriers to a decent retirement aren't just their contribution rates, but it's poor financial resilience in working life, sub-optimal decisions and a system that isn't, frankly, working hard enough for them.

“I say, fix the bucket first, and then let's have a grown-up conversation about putting in more money,” he added.

Smith highlighted how the industry moving towards implementing the value for money framework, scale and consolidation, guided retirement, collective DC, and targeted support, as examples, “all exist because we know the systems can work harder, yet when we're modelling ‘adequacy’, we assume the status quo – so of course, the answer being spat out of models [to improve adequacy] is that we just need to put more money in”.

Smith also noted that pensions were often viewed in a ‘vacuum’ without considering savers’ other forms of financial wealth, nor whether they have the disposable income to increase contributions.

Smith informed the audience that “when contribution rates last rose, opt-outs rose with them, as did short-term debt, while other savings fell”.

“In fact, research has shown that only a third of any new [pension] contribution increase is new wealth, and two-thirds is just [money] being reshuffled into our favour,” he said.

Therefore, solely focusing on raising increasing AE contributions to improve adequacy, “misses the point entirely about broader wealth, costs, or management system inefficiencies”, Smith said. “At the moment, I would argue that the system is exposed, and we can see its weaknesses if we just pour more money in. It's just simply going to mask those inefficiencies.”

He added: “I would ask us to address the status quo, [through] creative scheme design, adequacy assessments, enhanced employer oversight, stronger investments, and extraordinary engagement campaigns, the cost of which in comparison will be far lower than an extra few per cent [in pension contributions].

“I say, fix the leaky bucket before we put in more money.”

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