The whole principle of automatic enrolment relies on workers automatically joining a pension scheme, and then not taking action to opt out. Of course, apathy is only really the starting point. We don't need people 'sleepwalking' their way to saving; we need them to understand why they are saving and, if possible, to save more than the bare minimum.
That's why it's fundamental to create the right culture and the right messages around pensions generally, and especially around pensions reform.
Last month the DWP published analysis on the interaction between pensions saving and means-tested benefits in retirement. The report showed that under automatic enrolment 95% of people would receive back an amount that was greater than their original contributions, even after taking inflation into account, with over 75% expected to receive more than double.
Some people, however, would lose out. Those with 'extremely limited' entitlement to the state pension, for example if they had not built up the full thirty years of national insurance contributions needed to secure a full basic state pension, and people renting in retirement, who have potential housing benefit. This comes as no surprise - the Pensions Policy Institute work has highlighted very similar findings over the last few years.
I strongly believe in the value of saving for your retirement, and this report undoubtedly helps the Government, industry and media to get behind the savings message. I think it would be a mistake to rely solely on the number crunching. Partly, because people shouldn't base their decisions purely on the numerical modelling, as the underlying assumptions might not be relevant to them. Instead, they should consider personal circumstances, now and in retirement, how the benefits system will change in future before their retirement, and investment returns.
However, we need to look at this from a much wider perspective. We need to keep emphasising people will gain greater financial security and peace of mind by taking personal responsibility through saving for their retirement.
I think this report is a good first step in the right direction. However, if the benefits of saving for some segments of the population looks small compared to the benefits of spending now, then the industry and Government still have some work to do to convince people of the need to save.
The way the benefit system interacts with savings has to be simplified. We need to work on how to make those smaller returns on savings bigger, and to reassure people that it really is in their interests to sacrifice their consumption today. Already there are a few good ideas on the table: increasing the trivial commutation limit and introducing a pensions disregard in the means testing are a couple of suggestions. Ultimately, we should be working towards a place where we phase out means-testing's effect on retirement saving.
Collectively though we also need to provide help, information, guidance and advice to people trying to navigate the maze of whether to save. And that means giving them the right information at the right time - when they are automatically enrolled into a pension scheme and have to make the decision whether to opt out. This can incorporate the findings of the Government's recent analysis - most will benefit, but a few, in very particular circumstances may not.
If automatic enrolment is going to work, we need to take action to make sure pension savings is an instinctive positive choice, rather than a decision to be struggled over.
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