As auto-enrolment has now reached the full minimum contributions, what next? Pension providers and advisers rightly point out that 8% of band earnings contributed to workers’ pensions will hardly deliver a decent retirement income to supplement their state pension.
Several reforms are proposed to address this issue – mostly calling on the government to mandate higher contributions from more workers. Contributions from the first £1 of earnings and bringing in more women, younger workers, part-timers and the self-employed, should improve pensions across the country. However, I believe other changes are more urgent, to build on the success of the auto-enrolment programme and benefit existing customers, rather than just the industry.
The first issue is perhaps the most difficult but is nevertheless vital. All customers must be treated fairly. Good progress on reducing pension charge and improving governance have helped trustees and independent governance committees (IGCs) look after members’ interests, but lower-earners in net-pay schemes have been overlooked. While auto-enrolment schemes must offer ‘default funds’ with annual charges not exceeding 0.75%, the lowest paid must pay 25% extra.
Denying the low-paid the 25% government incentive they are entitled to is indefensible. While ministers say they cannot find ‘cost-effective’ solutions, regulators claim they ‘inform’ employers about net pay versus relief-at-source and trustees or IGCs of net-pay schemes show little or no concern about remedying this injustice, providers continue to collect the extra 25% from low-earners’ wages.
So far, these workers – three-quarters of whom are women – are unaware of the problem. That may be convenient right now because even if they find out, they cannot get their overpayments back. Treasury rules prohibit reclaiming the money and their employer controls scheme choice. Auto-enrolment legislation and regulations seem geared only to employers selecting a pension scheme and paying into it. Requirements to use a scheme suitable for their workers are missing – it just needs to be an authorised scheme. Even master trust assurance and authorisation have ignored this issue – almost all master trusts offer only net pay.
Furthermore, trustees and IGCs do not seem to feel duty-bound to protect low-earners in their scheme against paying 25% extra. Solutions can be suggested, but there seems little sense of urgency. Surely we all have a strong interest in sorting this out before these employees discover what has happened and seek redress. National headlines about pensions auto-enrolment schemes failing low-earners could undermine newly building confidence in pensions.
Other issues requiring rapid remedy include lack of concern for data quality and accuracy. As Pensionsync chair, I have seen first-hand the data problems affecting auto-enrolment. The prevalence of manual spreadsheets and CSV files from payroll to pension providers entails multiple errors and risks to data security and reliability. The Pensions Regulator monitors whether contributions are being made, but not whether they are actually correct and secure. A significant proportion of pension records are wrong.
Administration issues have not been taken seriously so far. Legacy pensions data are notoriously unreliable, but modern technology and automated data transfers should mean there is little excuse for failing to maximise efforts to ensure accurate auto-enrolment records. Introducing a pensions dashboard with error-ridden data could make the project fatally flawed.
Once net-pay and data accuracy problems are addressed, the next urgent task is improving consumer information and engagement. Pensions are a brilliant product, offering tremendous tax advantages and attractive long-term investment opportunities. After adopting improved administration processes and modern technology, the industry must explain the benefits of pensions to customers, to attract higher contributions. Rather than demanding legislators increase minimum contributions, I urge the industry to address the current injustices and inefficiencies and engage in direct-to-consumer marketing that promotes pensions properly for the mass market. Pensions can be great, but not enough people recognise this.
Baroness Ros Altmann is a former pensions minister