In this month's Retirement Planner Inquiry Helen Morrissey looks at auto-enrolment and whether it will push people towards financial advice.
We are now two years into auto-enrolment and by and large, it has surpassed everyones best expectations. Figures from The Pensions Regulator show more than four million people have been enrolled into a pension.
Opt-out rates continue to hover below the 10% mark. This is a far cry from the 40%-plus opt-out rates predicted by industry figures. Prior to auto-enrolment, even pensions minister Steve Webb said he would be happy with a 30% opt-out rate.
So far, so good. But auto-enrolment is only part of the solution to our retirement savings dilemma. We need to focus on getting people to engage more and save more into their pensions if we are to make any progress.
Given that auto-enrolment has been largely welcomed by members of the general public, can we expect to see any uptick in awareness of the importance of retirement planning? We asked participants to this months Inquiry to tell us their views on this subject.
The response was very positive, with 17% strongly agreeing that this is the case and a further 62% saying they agreed that auto-enrolment would be effective in raising the importance of retirement planning.
While the first couple of years of auto-enrolment have been a success, there remain considerable challenges, most notably raising the level of contributions. Current minimum auto-enrolment contributions stand at 1% each for employer and employee. Even when it reaches its maximum level in October 2018, it will only be 8% overall.
This is widely acknowledged within the pension industry as insufficient to generate a decent retirement outcome and that further increases in minimum contribution levels will need to come in over time.
However, the concern is that the general public will look at minimum contribution levels and believe they are enough to sustain a decent level of retirement income.
This view seems to be borne out when we asked survey participants to tell us whether they thought auto-enrolment was likely to give clients a false sense of security about their retirement income.
More than a quarter (27%) of those who answered the question strongly agreed that clients were being given a false sense of security, while a further 53% agreed. Only 20% said they disagreed with the statement, and no one strongly disagreed. It looks like auto-enrolment still has a long way to go before it can be considered a success.
The right advice
It is hoped that as people build their pension pot, their levels of engagement will also grow. Many figures have been bandied about, with some respondents saying people engage more with their pensions when they see they have saved up more than the value of a car or their house, for instance.
Others say that peoples engagement grows if they have saved up more than their yearly salary into a pension. What is to be hoped, though, is that as peoples awareness and engagement grows, this translates into a need to access regulated financial advice.
We asked our survey participants whether they thought this would be the case. The results were decidedly mixed: 3% strongly agreed that auto-enrolment would drive more people to seek financial advice, while 32% agreed with the statement. However, more than half (59%) disagreed with the statement, and a further 6% strongly disagreed that auto-enrolment would cause more people to seek advice.
Indeed, some believe that auto-enrolment could actually discourage people from seeking financial advice because they feel their retirement planning is already dealt with.
Eight per cent of survey participants strongly agreed with this statement, while a further 44% agreed. But 46% said they disagreed that auto-enrolment would turn people away from seeking financial advice, and a further 3% strongly disagreed with the statement.
So if people are not going to advisers for retirement planning, where will they go? Again, it has often been said that employers will become the gateway to retirement planning as they will often be the conduit through which employees receive advice and guidance. So will employers become the biggest influence in retirement planning? Once again, the results were mixed.
Only 3% strongly believed that employers would be the biggest influence on adequate retirement provision, while 35% agreed with the statement. More than half (54%) disagreed with the statement, and a further 8% strongly disagreed.
So while auto-enrolment has its plus points, it also brings significant challenges. People will accumulate larger pension pots than they have in the past, but the issue of engagement continues to loom large.
There is a significant chance that auto-enrolment will lull the general public into a false sense of security that they dont need to do more in terms of contributions or planning for retirement.
We need to send clear messages that auto-enrolment is only the start and that there will need to be significant increases to contribution limits if people are to generate enough for a decent retirement income.
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined