October marked the third anniversary of the introduction of auto-enrolment in the UK and, although there are plenty of employers still to stage, it has been successful in getting more people to begin saving for retirement.
This is a good start, but the next step has to be to ensure people are saving enough to secure an adequate income in retirement.
According to the Office for National Statistics (ONS), average contribution rates for private sector defined contribution (DC) schemes are 4.7%. Under the current trajectory, auto-enrolment is set to raise minimum contributions to 8% by September 2018, but even this will still not be enough for many of us.
To provide an income replacement rate equivalent to that of defined benefit (DB) schemes, contribution rates need to be in the region of 20%.
It is evident that the UK is running the risk of people falling into a false sense of security – thinking they will have enough for retirement purely because they are saving into a pension.
For the majority of people, higher contributions are needed to ensure a decent level of income in retirement.
There are two important elements to this. We need to encourage people to save more, and in order for them to do so, they need to understand how much they need to have saved and how much they need to put away each month.
Our Investor Pulse survey shows that only two in five (43%) of Britons know how much they should be saving for retirement. This is not something they will necessarily be able to work out on their own.
Advice and guidance has a critical role to play from advisers, providers and from government. The media can undoubtedly help to make saving more ‘mainstream’ too.
Once people understand the need to save, the next step is to encourage them to save more.
September saw the closure of responses to the government’s consultation, ‘Strengthening the incentive to save: a consultation on pension tax relief’.
Unless people are compelled to save, they need to be incentivised to lock capital away for retirement, but many commentators believe that Pensions tax relief can be baffling for savers.
When it is explained as a contribution from the government it is understood much more clearly. Terminology is important. Simply rebranding tax relief as a government match or bonus would have a positive impact in encouraging greater levels of pension savings.
The same is true for explaining the contributions an employer makes. Clever marketing would make it easy for individuals to immediately grasp that for every £1they save, their employer adds £1 and the government adds 25p.
Compulsory saving levels is another effective and appropriate way to improve the capital someone is likely to have at retirement, which in turn should lead to more adequate retirement incomes.
Introducing compulsory pension savings at an increased contribution rate under the existing auto-enrolment framework should be a real consideration. This is a move that would take time, and would need to be phased in, however introducing techniques such as auto-escalation could make all the difference in ensuring millions of people do not face poverty in retirement.
For those that are engaged and understand the need to put money away for retirement, we have a different problem – the lifetime allowance.
A number of people are effectively being penalised for wanting to secure a comfortable financial future. As it stands, the lifetime allowance undermines the very personal responsibility that the government is keen to promote and acts as a disincentive to maximise the investment return on their savings.
Removing the lifetime allowance (something that doesn’t apply to ISAs of course) would create more certainty for those who might otherwise refrain from saving into a pension due to concerns around exceeding limits on the value of their savings.
Pensions have seen a lot of positive changes in the past three years, but we should not lose sight of the need for more to be done to help strengthen a savings culture in the UK. Doing so will only help individuals achieve a more financially secure retirement.
Paul Bucksey is head of UK DC at BlackRock