Reports that the Government has suspended the second stage of the retirement adequacy review has been met by, at best, disappointment by the industry.
The second stage of the Pensions Review, looking at the adequacy of pension contributions, was due to start before the upcoming Christmas break. However, media reports have indicated that this will now be delayed.
The decision to suspend it, is said to have been made to reduce pressure on businesses which will already be trying to cope with the increase in national insurance contributions announced in the autumn Budget.
Phoenix Group analysed of the impact of delaying a rise in minimum auto-enrolment contributions. For a typical 18-year-old, increasing minimum auto-enrolment contributions from 8% to 12% could lead to almost £96k extra in their pension pot (in today’s money terms) at state pension age, equivalent to £64/week.
However, delaying this increase by five years, reduces the total additional savings potential by nearly £10k. A 10-year delay reduces the additional savings potential by around £22k, and a 15-year delay by £35k, the group calculated.
Catherine Foot, Director of Phoenix Insights, described the review as “a golden opportunity to look at the retirement landscape as a whole and prevent serious problems for individuals and the state in years to come”.
She said: “Hitting pause on the could be hugely detrimental to people’s financial future. In the next five years, the majority of defined contribution pension savers will enter retirement with less income than they expect or need, and this will worsen to a peak in the early 2040s.
“There are clearly some valid concerns around what increases to auto-enrolment contributions might mean for businesses, but that shouldn’t stop analysis and consensus-building on how and when we address the retirement crisis unfolding before our eyes.
“Increasing minimum auto-enrolment contributions is one of the biggest levers to tackle undersaving and we cannot afford to delay setting out a plan to incrementally raise contributions.
“With the impending retirement crisis about to unfold, the review should not be kicked into the long grass.”
Kate Smith, Head of Pensions at Aegon agreed that the delay was “not only deeply disappointing, but also concerning for many who will be left out in the cold. Most of Britain is currently under saving, and time is running out for many to benefit from higher mandated auto-enrolment contributions, which would help people to build up an adequate income in retirement.”
The second stage was expected to include the implementation of the 2017 review of auto-enrolment recommendations, such as reducing the minimum age from 22 to 18, and removing the £6,240 annual salary offset so pension contributions are made from the first pound earned, as well as phasing in higher mandated contributions from 8% to 12% of earnings over the next decade.
Smith said: “We fully understand that the Government needs to consider trade-offs, but delaying the second phase of the Pension Review risks damaging many people’s financial futures. Other Government initiatives, such as Value for Money and its ‘Scale’ plans may help some, but what matters most is higher pension contributions.”
Tom Selby, director of public policy at AJ Bell, added to the note of disappointment, saying: “Ultimately there may never be an easy time to scale up auto-enrolment, but pushing those difficult decisions back will simply store up problems for the future.
“Labour now needs to come clean on exactly how it plans to tackle pensions adequacy, which remains one of the most pressing issues facing society and is a potential ticking time bomb if left unaddressed.”
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