Unfortunate backdrop to pension auto-enrolment hikes
Comment Martin Flanagan
As we head to April and the kick-in of increased minimum contributions to auto-enrolment pensions, Aegon UK boss Adrian Grace is not the only sector leading light rueful about the unconducive backcloth.
Grace calls it the “big unknown” for the government and pensions industry. Will the extra financial commitment, often for younger workers not earning much anyway, trigger a surge in opt-outs or departures from the schemes?
Hopefully not, but the climate for their decisions could certainly be more propitious. Grace says the timing of the recent stock market correction is “unfortunate” given the headlines it is generating about the value of investing for people with perhaps not the most sophisticated understanding of financial markets, anyway.
Household budgets are squeezed, with average earnings still lagging inflation – another deterrent for many to put aside money for the long term.
And we seem to have also reached the inflection point on interest rates. Grace says last November’s hike by the Bank of England has had no discernible depressant impact on consumer sentiment towards taking out pensions.
But he views with some concern the more hawkish tone of the Bank of England last week on the speed and extent of further monetary tightening. That will affect mortgages and credit card bills, more short-term pressures on household budgets.
Employee contributions to auto-enrolment pensions rise from 1 per cent to 3 per cent this spring, and from 1 to 2 per cent for employer contributions.
That will take the joint minimum contribution up to 5 per cent from 2 per cent now, and up to 8 per cent from April 2019. That’s definite progress.
However, the industry believes an overall contribution of 12 to 15 per cent of earnings is necessary to enjoy a comfortable retirement. Society is on an educative journey on the subject.
The trouble is it is difficult to focus on the far shore if you are winded in the middle of the lake. It is just bad luck that this laudable, pragmatic scheme for millions of people to save more for their retirement decades down the road is moving to a new, more expensive staging-post as the pressures on income are sharpening.