Since the coalition came to power in 2010, Steve Webb has been charged with the task of implementing auto-enrolment. Helen Morrissey spoke to the pensions minister about the first year of AE and challenges that lie ahead
1. We’re now a year into auto-enrolment. How do you feel it has gone so far?
I think the first year has been an extraordinary success. Many people were sceptical that employees would reject it and that firms would not cope. In fact, what we’ve seen is well over a million people who are in workplace pensions this year who were not this time last year. Given that we’ve had decades of decline that’s a tremendous achievement. I think employers, the pensions industry and, dare I say it, the government, deserves a bit of credit.
I call this a quiet revolution. There has been almost no fuss in the wider media about this, yet we’ve done something extraordinary. We have taken money out of a million people’s pay packets, essentially without their permission, and largely they have said ‘Thank you.’
The emotion I think people experience with automatic enrolment is relief, that this is something people kind of knew deep down they needed to do, but it was complicated. It was difficult; they didn’t know how to do it. Now it has been done for them and, as a bonus, the government is putting money in, the employer is putting money in and they feel positive about it. I think we couldn’t really have wanted it to have gone better.
2. That seems to have shown in recent opt-out figures. What do you think of such low opt-out rates so early on in the process?
The early signs on opt-outs are really very encouraging. Our own research suggests that a fraction less than 10% have opted out, and that’s varied even within those relatively low numbers. So some firms have really gone the extra mile. They have put a lot of effort into workplace communications and developed their communications over a period of months, getting people to think about finances before pensions. A lot of innovation has gone on, which is very encouraging.
On one level, we needn’t get carried away, because clearly it is going to be harder with smaller firms that won’t have the resources to do that. On the other hand, some of the people who are being auto-enrolled in the big firms have already been in pensions; they joined the pension scheme when they joined the firm and have opted out, then they’ve been put back in again through auto-enrolment.
So you might think they weren’t a very fertile ground, but even among those people, they’re coming back into pensions, so I think we do have reason to be cautiously optimistic.
3. There’s been a lot of emphasis on charges. Are there any plans to cap charges for AE schemes and, if so, what would be a reasonable level?
At the moment, there is very little legal minimum safeguards as to what you are enrolled into, and we have to deal with that. We need to see that people are getting good value for money. We’ve said that we will be consulting on what makes for a quality workplace pension scheme for auto-enrolment and charges are clearly an important part of that. So we will consult on, for example, whether there should be a cap on charges.
I’m not going to pre-empt the consultation by saying, ‘It’s going to be so-and-so’. But the challenge is to make sure that when people are defaulted into auto-enrolment and then defaulted into a particular investment fund and have made no active choice at any point, that they’re properly protected. That really is the challenge for us. But we do think charges matter and we do need to be sure people are getting good value for money.
Similarly with automatic transfers, if they transferred without actively choosing from an old scheme to a new scheme, for example, we need to be confident they’re not going from something that’s good to something that’s bad. So we have to have minimum standards, and charges are an important part of that.
4. Is there not a really good case to be had for what’s good for AE schemes should also pass into legacy schemes as well?
Clearly, there’s a lot of focus on automatic enrolment, but there’s a lot of people out there who are already in pension schemes, some of which they entered into 15 or 20 years ago.
They may be facing relatively high charges or exit penalties or whatever and I think there’s a balance to be struck there. Clearly those were legal contracts entered into at the time with the rules as they were so there’s a limit to the extent you can say, well, we now know that they weren’t good value, we’ll rip up a contract. On the other hand, if people are being exploited we need to think about whether there are ways of enabling them to get out of those schemes in a fair way, so that’s certainly something we will be looking at.
5. With many millions of people coming into pensions via auto-enrolment we are going to be left with many small pots and your preference is to go with pot-follows-member. There has been a lot of discussion about this in the industry. How would you counter criticism of the approach?
I think most people recognise that if we want to avoid having tens of millions of small pension pots we need to take action. Although you could shunt all of these pension pots off to the home of lost pot somewhere, that would be a provider that people had never had any contact with, it would be another pension scheme they were a member of, as well as their current one. What we want is consolidation and engagement.
So we think the pot should follow you wherever you go. We are talking about new, DC auto-enrolment pensions here, not complicated pensions with guaranteed annuities and all the rest of it. These are simple pots of money that go with you and then you start to engage with. We think this is quite a revolution in pension saving. We’re tackling a difficult problem, but it’s an opportunity as well to get people interested in pension saving. So we’re legislating for it now and driving ahead with that.
6. Did you at any point consider putting auto-enrolment back to try and help the small employers?
Well, someone said to me the other day that it’s the ninth anniversary of the Turner Review. We’ve been talking about this for an awfully long time. There’s always a reason to put it off, but what do we do?
So we rescheduled the roll out so the smallest firms employing fewer than 50 people don’t come in until after April 2015. We’re phasing the contribution so that the mandatory minimum 1% from the employer, 1% from the employee, that’s only on a band of earnings, it’s only on the people who aren’t already in the scheme, it’s tax deductible. We couldn’t be tip-toeing in more if we tried, really.
7. Everything we’ve spoken about so far has been very much about the accumulation stage of retirement. However, there’s been a lot more emphasis on at-retirement and the importance of the decisions made there. Have you got any plans to tackle these decumulation issues?
We work closely with our colleagues in the treasury who lead on decumulation policy. I think the government has already made some important steps on that, freeing up things like what happens at age 75. However, clearly we are on a journey here.
There’s going to be a, very much larger number of people reaching pension age with DC pension pots and we need to think whether the model that we’ve used in the past is still fit for purpose for the future.
CV: Steve Webb
Speaking at Professional Adviser's conference
Equity release panel
Speaking at PA360
TISA's Peter Smith
Shone a light on 'closet trackers'