Opperman: 'No question' AE minimum should reach 12%
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Minimum auto-enrolment contributions should go up to 12% in the longer term, newly reinstated pensions minister Guy Opperman said just before his resignation last week. However, he was less supportive of splitting the burden equally between employers and employees.
The pensions industry has been calling for higher minimum pension contributions for several months. In January this year, the Pensions and Lifetime Savings Association said pensions needed to be ‘levelled up’ to 12%, split evenly between employer employee. In June, the Association of British Insurers followed suit, calling for 6% employer and 6% employee contributions by 2032.
Could pension contributions go up by the early 2030s?
Opperman told the Times last month that he would support raising contributions to “at least” 12%. Giving evidence to the Work and Pensions Committee last Wednesday, Opperman made an even clearer statement that “there is no question but that we should drive forward up to 12% in the longer term”.
Pressed by committee chair Sir Stephen Timms on timescales, Opperman said he “would hope” that 12% can be reached by the beginning of the 2030s, but then added that there was no timeframe for increases as yet. “I am just trying to get the 2017 review over the line at the present stage,” he noted. The recommendations from this review, when implemented, will extend automatic enrolment to include 18 to 21-year-olds and ensure contributions are paid on all salary up to the higher threshold.
‘A world of complications’: How will the bill be split?
The committee chair also wanted to know whether the first step towards reaching 12% minimum contributions would be to increase employer contributions up to 5% so that there is a balance of 5% employer and 5% employee contribution.
While Opperman conceded that an even split of contributions would need to be consulted on by the department, he added: “I am not personally wedded to that.”
He said: "Bluntly, you have to decide what the burden is upon the employee and the employer, whether that is 6% and 6% longer term or 5% and 7%. How that is done is a discussion that will have to be had and that is what we consult upon."
This burden might fall more heavily on workers once more. The MP for Hexham argued that recent governments have worked on the basis that “there should be a differential contribution with a larger contribution by one party and a lesser contribution by the other party”.
Creating parity of contributions would not be “changing the way in which we have done this, but it is a difference”, he claimed. “Why would you change the approach that we have already merely to get parity in that particular way? I believe that the best way is how it has been developed so far and the moment you start changing that you get into a world of complications."
PLSA proposes three-step plan to reach 12%
Reacting to the minister’s clear statement of support for 12% minimum contributions, Joe Dabrowski, deputy director policy at the PLSA, said the government needs to set out a timeframe for pension reforms.
“As the government seeks to ‘level-up’ the economy, narrowing wealth disparities between regions and different demographics, we think now is the right time for it to commit to a timetable for levelling up pensions, gradually, over the next decade, in three affordable steps,” he said.
“As the government seeks to ‘level-up’ the economy, narrowing wealth disparities between regions and different demographics, we think now is the right time for it to commit to a timetable for levelling up pensions, gradually, over the next decade, in three affordable steps,” he said.
From the mid-2020s, the PLSA wants the government to set out a plan to implement the 2017 review recommendations; then around the end of the decade, employer contributions should match those of employees, bringing the total to 10% of pay without requiring anything extra from workers. In the final step, “when affordable, in the early 2030s”, contributions should be increased to 12%, Dabrowski said.
The ABI has welcomed the minister’s support for gradually increasing pension contributions. A spokesperson said the association is committed to working with the government and industry to deliver reforms which will provide greater security in retirement for savers.
“We made the recommendation in our report on automatic enrolment, which focuses on the need for government to outline a plan for the next decade,” a spokesperson said, adding: “This includes fulfilling its commitments to extending eligibility by lowering the age threshold from 22 to 18, and reducing the lower earnings threshold to zero so that contributions are made from the first pound earned.”
