Aviva has called on the government to raise total auto-enrolment (AE) contributions to 12.5% over the next 12 years to give consumers a better chance of building an adequate pension pot.
The recommendation – part of Aviva’s Pre-Review of auto-enrolment, carried out ahead of the government’s own review next year – is the first in the group’s “10 steps to AE success”, which cover four different aspects of potential reform: adequacy, scope, consolidation and engagement.
Aviva argued the total auto-enrolment contributions – that is, from employer, employee and tax relief – should be phased up to reach a minimum of 12.5% by 2028.
From April 2018, the current minimum of 1% of salary from employer and 1% from employee (including tax relief) will rise to 5% in total, with a minimum of 2% coming from the employer. From April 2019, this will rise to 8%, with a minimum of 3% coming from the employer.
Aviva has also argued for the adoption of a flat rate of tax relief, rebranded as a ‘savers bonus’. This would be set at 33% or, to improve consumer understanding and engagement, ‘save 2 get 1 free’ – so for every £2 someone saves into their pension, they know the government will top it up with £1.
The group believe that raising the minimum AE contributions to 12.5% and simplifying tax relief would be a positive step towards helping more people save for their retirement.
Aviva head of retirement policy John Lawson (pictured) described the report as an attempt to encourage all parties, including other pension providers, to get involved in the debate in a positive way.
He added: “If, as an industry – and that includes think tanks and anyone else who might be influential – can debate this now rather than at the last minute, there’s a good chance we’ll reach some common ground that we can all take towards government when the review is firmly in place.”
Timeline to 12.5%
After the 8% contributions are reached in 2019, Aviva has proposed a freeze of four years, until 2023, to allow time for the contribution level to embed, and advance preparation for the subsequent increases to take place.
Between 2023 and 2028, Aviva argued, employer and employee contributions could increase gradually towards 5% each. These contributions would be complemented by the ‘savers’ bonus’ of 2.5% once the employer and employee contribution reached a total of 10%.
Pointing out people are living healthier and longer lives, which means an increasingly aging population requires support, Aviva UK and Ireland Life CEO Andy Briggs added: “By increasing the minimum AE contributions, we can improve the retirement prospects of ordinary people.
“AE has already proved hugely successful, but there is no time for complacency as we still face the challenge of people not saving enough for their retirement. So we need to build on the success we’ve had so far.
“I know there will be challenges to increasing contributions, both for businesses and employees, but I believe the benefits would be significant. Increasing minimum pension contributions and introducing a simpler and fairer tax system for pensions would be an effective way of giving more people the chance of a decent retirement.”
‘Nice and easy’
The Aviva report appears the week after NOW Pensions argued the £10,000 trigger and qualifying earnings calculation should be removed to boost the pension pots of lower-paid and part-time workers.
Aviva instead argued the AE trigger should increase to £10,400 – simply to make it easier for people. Lawson pointed out the £10,000 limit does not divide easily by 52, whereas £10,400 does. “It’s £200 a week, making it “nice and easy” for people to calculate and understand,” he said
Lawson acknowledged people would likely feel a hit to their take-home pay as employee contributions moved up from 1% to 5% but suggested the wage inflation anticipated over the coming years could help cushion the effects.
He added: “If your wages are going up at 3% a year and pension contributions are going up at 2%, then your take-home pay is still increasing. So it depends on what happens to the economy over the next two or three years.
“It is looking as if we might see inflation begin to rise again – and wage inflation would rise too. This would certainly make increased pension contributions more palatable.”
Aviva’s ’10 steps to AE success’
Adequacy
1. Phase towards 12.5% contributions by 2028
2. Adopt a flat rate of tax relief – ‘save 2 get 1 free’ – and rename as a ‘savers’ bonus’
Scope
3. Capture multiple job-holders
4. Explore options to capture self-employed
5. Remove upper enrolment ceiling of state pension age to encourage longer working life
Consolidation
6. Officially encourage consolidation of small pension pots of £10,000 or less
7. Permit ‘without consent’ transfers of contract-based workplace pensions, so long as savers are no worse off
Engagement
8. Increase eligibility threshold to £10,400 and lower contribution threshold to £5,200 so individuals can easily understand when they will be enrolled (once they earn more than £200 a week) and how much they will pay (contributions due on earnings over £100 a week)
9. Adopt three rules of thumb:
* 40-year rule: Aim to begin saving at least 40 years before target retirement date
* 12.5% rule: Aim to save at least 12.5% of monthly salary towards retirement
* 10 times rule: Aim to save at least 10 times annual salary by retirement age
10. Encourage digitisation of pensions through government policy and regulation and a minimum level of digital functionality
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