This is the first edition of Pensions News (PN) for 2018 and, as well as wishing you all a Happy New Year, PN would like to depart from the norm of making a resolution or a prediction and, instead, make a suggestion. The suggestion is set out at the end of today’s edition and it marks something of a departure for PN who has been relatively content in the past to comment, observe and encourage people to drink coffee on a Friday morning. That last suggestion is one PN is likely to keep up.
A number of newspapers (notably The Guardian in its 27 December (2017) edition) have indicated that 2018 will be a “big year” for pensions. The evidence for such a prediction comes in the form of legislation relating to automatic enrolment which will require minimum contributions to increase from the current 1% for employees and employers to 2%. The changes will take effect from 6 April this year with a further increase, taking employee contributions to 4% and employer contributions to 3%, coming into effect from 6 April 2019.
It follows that having to make contributions at an increased rate will increase the cost of participating in an auto-enrolment pension scheme although if one describes the increase in bald terms, an increase in contributions from 1% to 2% and then to 3% of pensionable pay over a two year period does not sound like a big deal.
If, on the other hand, one were to put things differently and tell an employer that its minimum pension contribution would increase by 300% over the next two years, that news would probably get the employer’s attention. If one were to tell an employee that his / her minimum pension contribution would increase by 400% over the next two years, that would certainly (in PN’s view anyway) give the individual pause for thought. It may even cause the employee in question to opt out of the auto-enrolment scheme altogether. The Guardian, a newspaper for which PN normally has a lot of time, chose to describe the requirement to increase contributions to a pension scheme in terms of an individual’s “losing” money. This, felt PN, was misleading. It ought not to come as news to anyone and especially not a newspaper as good as The Guardian is, that a pension scheme, plan or arrangement remains a tax-efficient way of saving money for retirement and that money will not be “lost” at the point it is deposited into the pension plan. The main difference between a pension plan and a more orthodox savings’ plan is that one cannot generally access one’s pension savings until one is at least 55 years old. Even allowing for that difference, it is difficult in the extreme to see how a contribution to a pension plan is the equivalent of “losing” money.
PN referred to a 400% increase in minimum pension contributions deterring individuals from paying into a pension plan. This is, unsurprisingly, not what the Government wants. By using an opt-out system in the context of auto-enrolment (i.e. you’re in unless you opt out), the state has relied heavily on collective inertia; the human tendency to default to doing nothing unless there is a strong reason for doing something. The potential problem is that a sharp increase in pension contributions may constitute a very strong reason for young people to opt out of pension scheme membership – particularly where the young person in question is starting out in employment with student loans to repay. There is evidence to suggest that young people are already opting out of pension scheme membership. In previous editions of PN, the writer has expressed concern for young persons, particularly those who have taken the hint and invested in higher education, who are weighing up the pros and cons of contributing to a pension scheme. Towards the end of 2017, PN expressed alarm on reading in the Financial Times, that there was evidence of increasing numbers of health workers (including junior doctors) opting out of membership of the NHS Pension Scheme. The NHS Pension Scheme is, relatively speaking, one of the most generous pension schemes in the country and one would have to be suffering from some sort of mental or serious financial imbalance to stop contributing to such a scheme in order to have (a little more) cash now.
This, of course, is the issue. A number of young people are evidently so badly off that they feel almost bound to opt out of contributing to a pension plan. If educated doctors are opting out of membership of a relatively generous pension scheme (vis. the NHS Pension Scheme as stated above) there is probably a law of averages which states that, for every junior doctor opting out of membership of the NHS Pension Scheme, there will be 10.5 other young people opting out of a significantly less generous auto-enrolment pension plan. The odds are that educated young people will opt out in increasing numbers when they understand that minimum contributions are set to double in April this year and increase by a further 50% in April 2019.
The point has been made by PN and other commentators that the current younger generation is on the receiving end of a bad deal. Educated young people leave university with debts which are, typically, well into five figures. It is then hoped or expected (depending on who one is) that they will get on to the property ladder, pay taxes, repay their student loans and build up savings for their eventual retirement – when it comes. To do all those things, today’s young generation will have to earn very large sums of money – they will need every penny. Possibly inevitably, young people are least interested in pensions and PN accepts that it is difficult to get anyone interested in a pension until they need one. Typically, PN has found, interest in a pension increases in line with one’s advancing years.
The question is, therefore, how to incentivise young people to contribute to a pension plan and PN has a suggestion which is, very deliberately, light on detail. The suggestion is light on detail on the basis that detail tends not to be read in articles such as this. In addition, those who read detail tend to go on and “borrow” it.
The principle of PN’s suggestion applies to any individual with a student loan. This is likely to be mainly young people but need not be. Such individual should be encouraged to contribute to a pension plan and PN acknowledges that that “encouragement” must take a tangible form. The encouragement in this case is that, in relation to each person with a student loan then, for every £1 that that person contributes to a “qualifying pension plan” or the National Employment Savings Trust (aka the NEST), £1 will be contributed by the State to that person’s student loan account. The value of contributions would be limited by the annual allowance and, more widely, by the lifetime allowance (however PN feels that, for the vast majority of young persons, the lifetime allowance is an irrelevance). If the young person’s parents/ benefactors wished to make the contribution on the young person’s behalf, there ought not to be a problem since the contribution could not be accessed immediately and would, one expects, ultimately reduce the burden on the state system. It may even cause young persons to become interested in pensions although this, PN feels, is probably in itself a symptom of his own fevered imagination.
Until next time…..