It is now a year since the Government introduced its auto-enrolment policy, a scheme designed to ‘nudge’ people into saving into a workplace pension. With some 11 million people in the workforce saving nothing or too little for their retirement, people certainly require a bit of a shove.
This was the backdrop for a debate the SMF hosted yesterday at the Lib Dem fringe with Steve Webb MP, the Pensions Minister. And, the question we were there to discuss was: how far will this nudge make us a nation of savers?
Two main points stood out. First, since October 2012, when the SMF held a debate marking the launch of auto-enrolment, optimism has grown that the scheme will not suffer from large numbers of opt outs. Only one in ten have left the scheme thus far, compared to the three in ten predicted before the policy came in. This augurs well as the scheme is rolled out to smaller businesses. A year ago, much of the discussion focused on whether the Government might have to mandate people into pensions. Now, with the economy turning round, a nudge seemed sufficient.
On a second aspect of the scheme there was much more debate. For, while the numbers contributing to pensions has grown, the amount they are contributing remains very small. Even when the scheme reaches its maturity after 2017, mandatory contributions will only reach 8%. Yet, nearly double that is needed to ensure an adequate income for a typical employee. And, international experience in New Zealand suggests that employees and employers will anchor around the minimum contribution levels.
So, conversation turned to whether additional nudges were needed to boost contribution levels. Two nudges look worthwhile: as the SMF has previously argued, we could introduce an automatic escalator so that people commit to higher contributions in the future or to funnelling future pay rises into their pension pot. In addition, as Steve Webb argued, we could make much more of pension tax relief simply by making it more visible. Who knows, for instance, how much the state is putting into their pension pot alongside their own contributions? Is any Universal Credit claimant likely to know that, for each £1 they put aside, the Government will put £2 of its own cash into their retirement piggy bank? Just making this relief more visible is likely to nudge people into saving more.
But, as the Minister pointed out, we could end up with one nudge too many. Given that auto-enrolment makes a virtue of people’s apathy, future governments will have a duty to ensure that savers do not sleepwalk into uncompetitive schemes with high charges. The OfT is now investigating charging and the advisability of a cap. And, here attendees were less clear that a simple nugde was the right policy. An arbitary cap (at say 1%) might remove the most egregious cases, but it may not boost competition effectively. Providers would be free to hover just below the cap whilst pointing consumers to the fact that everything below 1% has government approval, and masking the differences in charges that exist in the market.
So, three nudges might be enough.
The event – Autoenrolment: it’s talked the talk but can it walk the walk – was sponsored by B&CE and is also being run at the Labour and Conservative party conferences