Adequacy and the self-employed were two of the key topics during a Work and Pensions Committee hearing on Wednesday where representatives of DC master trusts shared their views – and called for a new pensions commission to tackle these issues. 

 

Some of the main master trusts in the UK, looking after the pensions of millions of workers, would support the creation of a new pensions commission to gather evidence and build consensus around where next for automatic enrolment. 

 

A pensions commission set up in 2002 and chaired by Lord Adair Turner had recommended the introduction of auto-enrolment, which was phased in starting 10 years later, between 2012 and 2019.  

 

 

At a hearing for the Work and Pensions Committee’s inquiry into pension freedoms on Wednesday, Philip Brown, director of policy and external affairs at B&CE, pointed out that the commission had recommended a compulsory contribution rate of 8% but said a voluntary contribution of another 8% was needed to reach an adequate level of retirement income. 

 

“The latter clearly hasn’t happened,” Brown noted, saying that adequacy “is something we are still aspiring to at the moment”.  

 

B&CE, which provides master trust the People’s Pension, is currently conducting research by the Pensions Policy Institute which is going to show that half of the population will not achieve an adequate rate, he said. The research is due to be published shortly and based on the latest Wealth and Assets Survey by the Office for National Statistics. 

 

The Turner commission had recommended “aiming for a ‘base load’ of earnings replacement” of 8%, arguing that this might secure the median earner a pension at the point of retirement of about 15% of median earnings on top of the 30% which state provision would deliver under its proposals; these included increasing state pensions as well as state pension age. 

 

However, it added that “many will want to secure a higher level of pension replacement. We therefore also recommend that voluntary contributions on top of the default level should be allowed, subject to a cap: for the median earner this would enable the individual and/or their employer to contribute in total about twice the default amount, accumulating a pension pot which would take them to a total combined replacement rate approaching the two-thirds that many say is their target.” 

 

Two-thirds is often regarded as an adequate replacement rate of people’s working age income that would allow them to maintain a similar lifestyle. 

 

Brown said there was currently no forward-looking way to improve auto-enrolment; “a pensions commission could do that”, he said, but also noted that there was an alternative to a commission, whereby stakeholders assist government to achieve the same end; which route is being chose is a question of what is most practical, he said. 

 

 

Others were more strongly in favour of a new commission. “We certainly would support a new pensions commission being established,” said Joanne Segars, who chairs the trustee board of master trust Now Pensions. A new commission should look at adequacy as well as gaps in the system to avoid people falling through them, and pension saving by the self-employed. “This issue was parked when the [Turner] pensions commission produced its report. It was put in the ‘too difficult’ box,” she said. 

 

While supportive of setting up a new commission, Segars was clear that if this is done, it should not delay the implementation of the 2017 Automatic Enrolment Review, which the government has said it will do in the mid-2020s. 

The government agreed to lower the minimum enrolment age to 18, abolish the lower earnings threshold for contributions and look at solutions for the self-employed. Segars said that “we’d argue for abolishing the £10,000 earnings trigger” as well, something the review stopped short of; government argues that those earning less than £10,000 are already seeing adequate income replacement from the state pension and would be at risk of oversaving while unnecessarily lowering their current lifestyle if they contributed to occupational pensions. 

 

"What we need is for that consultation to start and for a clear roadmap. The mid-2020s are not far away now,” Segars stressed, noting that industry needed time to implement the changes from an operational perspective. 

 

 

Asked if the industry was any closer to “cracking” getting the self-employed to save for retirement, Will Sandbrook, executive director at the Insight unit of master trust Nest, said: “A bit, but not that much.” 

 

Nest has been conducting research and trials to understand the savings barriers to the self-employed and routes to encourage or nudge them to save more. 

 

One of biggest challenges, he said, was the fact that the way the self-employed receive income and manage their money was “widely disparate”, ranging from cash and Excel sheets to money management systems, with many not distinguishing between work and personal finances.  

 

Greater flexibility could make products more attractive to them, “but in truth I think these things will have an impact on the margin”, he said. To achieve an impact comparable to that of auto-enrolment for the employed population, he said the most fertile area was to be found in the digitisation of tax. “As we move to a world where tax filings are more frequent, does it create an opportunity for an auto-enrolment type intervention? There may be potential for a more material step change,” he said, with the tax system providing a common interface through which “default-type nudges” could be made. 

 

However, “we have to accept that auto-enrolment works the way it does because there is a third party, the employer, who is able to create an account [and create] income deferral”, he said. 

 

Brown noted that more evidence was needed to understand this heterogeneous group, while Darren Philp, director of policy and communication at master trust Smart Pension, said a legislation was needed: “I don’t think we’ll move the dial by messaging. We need a legislative solution with some of features of auto-enrolment but which isn’t auto-enrolment." 

 

Philp said consensus needed to be built with self-employed people rather than assuming that they needed pensions, as it might show that “there might be other products outside pensions that are more suitable”.