Reinforcing Automatic Enrolment

Ahead of the DWP review on Automatic Enrolment (AE), leading pensions expert Michael Johnson details 12 specific pension reforms in “Reinforcing Automatic Enrolment”.

His recommendations are intended to :

• give individuals a stronger sense of personal ownership over their savings,
• ensure that the AE opt-out rate remains low
• broaden AE’s eligibility criteria particularly for lower earners and the self-employed
• increase the potential retirement income of lower earners
• incentivise contribution rates above the statutory minimums
• radically simplify the current pensions and savings system
• save the Treasury £10 billion a year

Johnson argues that while Automatic Enrolment in workplace pension schemes has been a success, the Government can do more to encourage saving, especially among the young and the self-employed. This can be achieved by redistributing the current savings incentives, including

• scrapping all Income Tax relief and NICs rebates
• replacing them with a 50% bonus paid on the first £2,000 of post-tax contributions (paid by employee or employer), and 25% on the next £6,000 (i.e. an annual bonus cap of £2,500): in total, £10,500 per year, which is more than adequate.

There are 12 specific proposals, particularly designed to benefit low earners, the self-employed, the young, employers and the Treasury:

1. The AE Advisory Group should emphasise the importance of pension dashboard utility for engagement with workplace saving, notably the ability to consolidate disparate pension pots into one pot.
2. Given the AE Review’s remit to ensure value for money for the taxpayer, it should consider the implications, for AE contribution and opt-out rates, of replacing Income Tax relief and NICs rebates with a re-distributive 50% bonus paid on the first £2,000 of post-tax contributions, and 25% on the next £6,000, i.e. an annual bonus cap of £2,500, paid irrespective of tax-paying status.
3. Automatic enrolment contributions from employees under the age of 50 should be eligible to be paid into a Lifetime ISA, attracting a bonus.
4. Automatic enrolment contributions from employers, and employees aged 50 and above, should be eligible to be paid into a Workplace ISA, attracting a bonus. The Workplace ISA would share the annual bonus cap with the Lifetime ISA. Tax-free withdrawals could be made from the age of 60. The Workplace ISA, which could reside within a Lifetime ISA.
5. The Lifetime and Workplace ISAs should be regulated in the same way as workplace DC pensions schemes, including a charge cap. They should have the same Inheritance Tax treatment as pensions pots, and be excluded for means testing purposes.
6. The minimum age for automatic enrolment should be lowered to school leaving age, thereby including apprentices, for example.
7. AE’s minimum earnings threshold of £10,000 should be scrapped.
8. The use of “band earnings” in calculating automatic enrolment contributions should be replaced with “total earnings”, capped at £40,000.
9. Class 4 NICs (self-employed) should be increased by 3% to match Class 1 NICs (employees), characterised as bonus-eligible “auto-contributions” to a Lifetime ISA (for those under 50) or otherwise a Workplace ISA. These should be accompanied by a default which would redirect the 3% to HMRC, triggered by non-payment of a bonus-eligible “quasi-employer” contribution. The latter could, to some degree, count as a tax-deductible business expense. Both auto-contributions and quasi-employer contributions could be ramped up in the style of AE, increasing in 1% annual increments, to 3% each by 2020, say.
10. The minimum AE contribution rates for employees and employers should be raised by 1%, to total 9% of total earnings. Proposal 2’s bonus structure would take total contributions to 13.5% of total earnings on the first £2,000 of employee and/or employer contributions, and 11.25% on the next £6,000.
11. “Auto-protection” should be introduced, with two distinct components:
    (i) “auto-drawdown” at private pension age, in the form of an annual income drawdown default of between 4% and 6% of pot assets, paid monthly; and
    (ii) “auto-annuitisation” of residual pots, perhaps twenty years after private pension age.
12. The AE Advisory Group should encourage the Government to reconsider its opposition to NEST developing mass market decumulation products, to include a collective drawdown capability to enable retirees to pool their longevity risk.

Michael Johnson - Friday, 14th July, 2017