The pensions (extension of automatic enrolment) (no. 2) bill enables the delivery of two main recommendations of the 2017 AE review: to lower the age of eligibility for AE from 22 to 18; and to remove the lower earnings limit, which means that pension saving will count from the first pound earned.
The swift granting of royal assent following the bill’s passing in the House of Lords last week means that the Department for Work and Pensions will soon be able to set the wheels in motion to implement these changes.
In the case of making pension savings count from the first pound earned – a move which will significantly increase the proportion of earnings saved, particularly for those with lower earnings – timing is everything.
It’s crucial that this happens at a time when earnings are rising faster than inflation so that people do not face a choice between stopping saving and being able to afford to live, as they do now. It’s important that this is phased in slowly and carefully.
One of the reasons for AE’s success is that, historically, opt out rates are far lower than had been planned for and policymakers will be well aware of the risks of doing anything that might prompt a significant number of workers from deciding they can no longer afford to make contributions.
Savings rates have held up pretty well through both Covid and the cost of living crisis, but careful stewardship of the policy remains a priority.
The DWP’s focus should not only be on these changes to AE, but on a much bigger picture.
We think that both the confused debate over the future of the triple lock and recent government research showing that 38 per cent of people are not saving enough for retirement make it clear that a more fundamental review of UK pensions adequacy is required.
For us, the next step on is developing consensus about what the pensions system is trying to do. At first glance that sounds silly, it’s obviously there to replace income once people are no longer in work. But how much income?
And given that we have two main pillars of entitlement – the state pension and workplace pension saving – what should we be looking for from each pillar?
We see a flat rate state pension as the cornerstone of retirement saving in the UK. Flat rating the state pension avoids the traps created by means testing. Traps that the pre-Turner Commission UK was walking into at a worrying pace.
Unlike other countries like the US, the UK has never managed to sustain an earnings-related state pension. As the recent debate over the triple lock has shown, we’re unusually vulnerable to concerns about cost driving the debate over the adequacy of the state pension.
That tends to lead to calls for greater reliance on means testing to prevent poverty in retirement and control the cost of the state pension.
