Automatic enrolment success at risk from pension regulation weaknesses
15 May 2016
The Work and Pensions Committee report says the process of automatic enrolment (AE) into employer pension schemes is a "success story", but major concerns have arisen over where those funds are being invested. There are also concerns that the Lifetime ISA financial product will distract from the aim of AE, namely to get more people, saving more, for their retirement.
- Automatic enrolment
- Automatic enrolment (PDF 579KB)
- Inquiry: Pensions automatic enrolment
- Work and Pensions Committee
Master trusts a potential risk for Automatic Enrolment
The report points to the "tremendous success" of AE, with additional 6.1 million people enrolled in a workplace pension and saving for their retirement. Employer compliance rates are high and employee opt-out rates are low.
But the Committee says gaps in pension regulation have allowed potentially unstable master trusts onto the market, and employers may unwittingly put their scheme members at risk of losing their retirement savings.
There is also not enough clarity about employers' liability if one of these master trusts were to collapse, or if any chosen pension fund fails. There is also a risk that wider faith in auto-enrolment and the impressive gains in retirement savings will be undermined.
LISA could distract from Automatic Enrolment
The Committee also raises the concern that the new Lifetime ISA (Individual Savings Account) could distract from AE, with employees potentially opting out of their workplace scheme to put savings into a LISA. The LISA is being introduced at a time when the majority of small businesses are still to move on to AE and statutory contribution rates are yet to rise.
While the returns on the LISA appear attractive, as is the fact that it can be put towards the purchase of a home, in the long term it would leave people worse off. It says Government has been sending mixed messages about the best way to save for retirement and should conduct urgent research on any effect of the LISA on AE and report on this before the 2016 Autumn Statement.
How can Government support the move to Automatic Enrolment?
The period of moving 1.8 million small and micro-employers on to AE will be the most challenging phase of the programme, and Government must do everything possible to support this phase:
- the AE campaign - famously featuring a "giant psychedelically decorated furry creature called Workie" - should now focus on the financial consequences of non-compliance, emphasising that AE cannot be ignored
- DWP should provide reassurance to small and micro-employers about where liability will fall if their chosen pension scheme performs badly or fails
- DWP should work with HMRC to expand Basic PAYE Tools to support small businesses in meeting their AE obligations: it must be as easy as possible for small businesses to participate without additional cost
The report comes as the Committee embarks on a major inquiry into pension regulation and the BHS pension fund crisis. The Committee has called for the inclusion of a Pensions Bill strengthening regulation of pension funds in the Queen's Speech next week.
Frank Field MP, Chair of the Committee, said:
"Auto-enrolment has been a tremendous success that will ultimately see approximately 9 million people newly saving, or saving more, in a pension. Crucially now we must do much more to ensure that people's savings are put in the best possible place, and are secure.
To this end, we greatly look forward to seeing a Pension Bill in the Queen's Speech this week. This is what we and others have been calling for."
Craig Mackinlay MP, Committee Member, said:
"The most important thing now is to support the final 1.8 million small and micro-businesses into AE. HMRC provide free 'Basic PAYE Tools' software to enable smaller employers with up to 9 staff to manage payroll calculations and reporting requirements under the Real Time Information (RTI) regime.
It is essential, in my view, that additional functionality be added to this application to enable smaller employers to manage their Auto-enrolment obligations without needing to outsource their payroll function or be forced to buy proprietary software."