Amid the mass of announcements from the Chancellor George Osborne in the recent Autumn Statement the decision to delay the increase in minimum Auto-Enrolment(AE) pensions contributions was to be frank, an odd one. Given the success of AE to date and the continued need to boost pension savings even further, the six month delay will both cost employees money and potentially undermine the strength of the pensions argument.
Retirement Shortfall
The Autumn Statement had a number of pension related announcements but one of the least expected was the announcement of a delay in the increase in minimum contribution rate increases. The next two phases of increase will be aligned to the tax years – effectively postponing the rise in employer contribution from October 2016 to April 2017.
This delay poses some interesting questions. In 2013, Britain came out worst in a global ranking of the largest retirement shortfalls, with Britons’ savings due to run out just seven years after giving up work. The average retirement in the UK is expected to last 19 years, but the average savings pot is only expected to last for 37% of that time, according to the report from HSBC. The 12 year shortfall between expectations in the UK is the worst discovered by the bank’s study, which covered 15 countries.¹
Since then, of course, pensions auto-enrolment has been introduced, and over 5.4 million individuals have already been auto-enrolled into a pension. While opt-outs have been low, and government figures suggest that the number of people who are saving for their retirement is at its highest point since 1997, the pensions shortfall is, of course, still a concern.
Why, therefore, has the government opted to delay contributions by six months – a decision which could cost an individual several hundred pounds? When the average 35-year-old needs to save £660,000 into a pension plan if they have any hope of matching the standard of living enjoyed by today’s pensioners (but have so far managed to put aside just £14,000), according to pensions company Royal London, every pound counts.²
Implications of Delay
On the face of it, of course, this delay provides small and micro companies with a little bit of breathing space to determine how the AE contributions are to be funded. But beware – in a fiercely competitive jobs market, pensions contributions are a key component of the overall benefits package. If employees are missing out on six months of expected contributions they may well be looking to employers to boost the benefits package in some other way.
Does a delay of six months really make a difference when the increases from 2% to 5% to 8% are still going to happen? The truth is that it is hard to say right now. However, given the consistent push by government for individuals to take more responsibility to save for retirement, this is without doubt an odd decision and one that will cost employees money. At a time when even the most positive pundits admit that the AE pensions contributions are a drop in the ocean when it comes to attaining a decent post retirement standard of living, the government must hope this decision does not come back to haunt it.
¹ http://citywire.co.uk/money/brits-face-the-biggest-pension-shortfall/a659927
² http://www.hl.co.uk/news/2015/9/30/huge-pension-shortfall-facing-uks-young-adults
