News - AE: auto-escalate contributions

3rd March 2014

Pensions minister Steve Webb is urging employers to voluntarily auto-escalate their pension contributions in a bid to ensure workers have a comfortable retirement.

Speaking at a conference in London yesterday Webb said that to ensure good pension outcomes for workers auto-enrolment contributions would need to rise higher than the 8% (3% employer, 4% employee and 1% tax relief) planned in 2018.

Despite this he said auto-enrolment was “so successful it doesn’t get into the newspapers”.

“For an employee on a salary of £17,000 or more, minimum contributions of 8% are not enough for the standard of living in retirement they are used to while working,” he said.

“We have to get people in but what we don’t want is employees coming back to you or me when they retire saying ‘hang on a minute, you set this scheme up and I assumed it was all sorted but actually I am not getting the standard of living I thought I would’.

“I am very much one step at a time on this, it is very tempting in the world of pensions to start guessing what is next. But we have only got three out of 10m saving so far, so our laser like focus is to get that remaining 7m in to good quality schemes – that is absolute front and centre. We’re a long way from putting a date on introducing auto-escalation.”

Compulsory question

Responding to a question on making auto-enrolment compulsory, Webb said: “From my point of view, if nine out of 10 people are freely staying in, why would you want compulsion? Most of the people opting out probably should, so forcing them to stay in seems entirely counter-productive and could even alienate those staying in.

“When people are not forced into doing it and are given control over the decision, they are far more willing.”

His comments have been echoed by head of pension’s research at Hargreaves Lansdown, Tom McPhail.

He told Payroll World: “There are only really two directions you can go from here, either you opt for compulsion, saying ‘that was a good start but it will not work so let’s just force everybody’ but if you do that, you might as well do that now.

“Or you work on the communications and get all these individuals to take responsibility for their lives in retirement.

“Automatic escalation is a hybrid of inertia, coupled with communication and consent. It is a perfect illustration of the fact that there is nothing wrong with auto-enrolment so far but it is not a complete solution.

“You still need to talk to workers, engaging them and get them to take responsibility for their retirement provision.”

(Information gathered from Payroll World)

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