By Nick Ayton, Managing Director of Friendly Pensions.
The UK is not the first country to introduce an automatic enrolment based workplace pension programme. In fact, we are quite late to the party. Many other nations, primarily Australia, Canada, Sweden, Denmark, Poland, Uruguay and New Zealand have had similar systems for many years, and there is much that we can learn from their experiences, successes and difficulties.
In the UK we are just starting out and it is already clear the contribution levels need to increase rapidly from the minimum levels set out by the regulator. One of the issues is the upcoming UK general election, as this is slowing down much needed reform for fear of losing votes.
By early 2018 all required businesses will have implemented a qualifying workplace pension scheme and up to 11 million workers will be enrolled as a result. From October 2018 total minimum contributions will stand at 8%. This is made up of 4% payable by the employee, 3% payable by the employer and 1% tax relief on the jobholder’s contribution. The realisation is that 8% is simply not enough to provide a comfortable retirement, especially with statistics indicating that the average retirement could now last as long as 2 to 3 decades as life expectancy increases to 89.
It is clear contribution levels would increase more quickly were this not seen as a vote loser, yet the government knows full well that contribution levels must be higher and are prepared to let things drift for four more years. Can we expect to see 15% to 18% contribution levels split between employers and employees…?
Of course the government will increase contribution bandings once the election is out of the way, no matter how unpopular this becomes as the bottom line is there is no more money in the welfare pot.
It soon becomes apparent that our minimum contribution levels are way short of where they should be. Based on current levels your parents would have needed to start funding your pension 20 years before you were born. Almost every other nation with a similar pensions programme has greater minimum contribution levels. Denmark for instance, stands at 12% and Sweden at 18% with the likelihood that this will soon increase to 22%.
So how much is enough to retire on, and what is the optimum level of contribution to pay into a pension? Of course the truth lies somewhere between an unrealistic level of salary being contributed to your pension pot and retirement age rising to 75 and beyond to make the numbers more balanced.
Overall the concept of an auto enrolment pension scheme is a good one and Super Annuity in Australia which was very successful took a few years to settle down as behaviours were influenced and attitudes changed to eventually enforce workers to save for their retirement.
We anticipate a series of announcements to this effect in the next governmental term with changes to be applied following the completion of AE rollout in 2018. Watch this space.