PLSA AC 2020: Evidence-based changes needed to address 'pressing' AE issues

Industry experts have emphasised the need to further develop auto-enrolment (AE) policy in order to support pension savers on pressing issues around decumulation, adequacy and coverage.

Speaking at the PLSA Annual Conference 2020, Department for Work and Pensions head of AE and Nest policy, Rob O’Carroll, also emphasised the need to follow an evidence-based approach and “not to rush to solutions”.

O'Carroll stated: "I think the hallmark of AE has been the evidence on which it is built, but also the measured, gradual implementation path.

"Any interventions must be personalised, relevant and timely, which is hard."

He also emphasised the need to consider the wider financial wellbeing context, stating that "it can't all be abut pension savings and contribution rates".

O'Carroll continued: “Many millions of working age people are financially struggling, and this was before the impact of Covid, which has put further stress on that.

“We may need to look at somethings outside of this that then take us on a journey towards contribution rates.

"Thinking in particular around what would enable longer term saving, I think the Nest Insight sidecar trial and some of the work that the Money and Pensions Service (Maps) is doing is really interesting in building that evidence base."

His comments followed a session poll, which revealed that the majority (63 per cent) of attendees saw contribution levels as the most pressing issue facing AE, whilst almost one fifth (17 per cent) highlighted issues around net pay and relief at source tax relief issues.

Pensions Policy Institute director, Chris Curry, agreed that contributions do need to be higher for adequacy reasons, clarifying however, that there is no “one-size-fits-all” approach and that any changes will need to be done gradually.

He also highlighted the importance of sharing contributions with employers, identifying this as "incredibly important" to the success of AE, and could encourage some savers to remain opted in, if they are unwilling to lose large employer contributions.

"The real challenge now," he clarified, "is that many people will be thinking, as a result of Covid and shocks to their income, that their contribution could be lower".

He continued: "There’s a really difficult balancing act, and I think this highlights what the trade off of pensions savings is... so we do need to look at the balance.

"AE is still really in its infancy, so we do need to think about how adequate the incomes will be, but I think we’re gonna have to take a fair amount of time in the current situation to think about how we can deal with short-term issues and not undermine peoples long-term outcomes."

Now Pensions director, Adrian Boulding, echoed this, adding: "We’ve got to get the level of employer contribution up, and they will need the state to mandate that, and they’ll have to do that gently over time."

O'Carroll acknowledged that many employers, particularly larger, are already paying above statutory minimums, warning however, that if this was to be extended to all employers, there would need to be greater consideration of the impact on employers, sectors, and individuals.

Issues around DC decumulation, meanwhile, were raised as a more urgent issue, with Boulding noting that, by the time the PLSA conference is held in 2021, Financial Conduct Authority (FCA) data projects that another 400,000 people will have “squandered” their savings.

"People need more help at retirement to select a sensible decumulation strategy," he argued, describing the choice architecture as "awful", further reinforced by investment pathways which present annuity or income drawdown as if they were "an exclusive 'either or' choice".

He continued: "How do we get people from starting out 100 per cent inertia where they begin their journey in AE, to being fully engaged by the time they arrive at retirement?

"Because if they’re not engaged at retirement then as we all know too well they will probably just cash that in and squander it."

Considering this, Boulding highlighted the option of default consolidators, stating that this combines “the best bits” of AE, such as inertia and employer centricity, whilst also potentially allowing for greater engagement and choice.

Curry noted that many of the issues highlighted throughout the session would have been addressed by the recommendations of the AE review in 2017.

He stated: "I think when it comes to coverage the gaps that were identified back in 2017 still really exist, and that’s where we still need to be focusing.

"I think that covers both ends of the spectrum, as we want to be bringing in younger workers as well as also increasing that opportunity for older workers, particularly as we try to come to grips with what’s happening at the moment in the labour market.

"This is in line with the expectation that people will end up with more gaps in their contribution history going forward, and so potentially might need more time at the end of their career when they’re actually refilling some of those gaps that might have happened."

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