1. The (in)adequacy of DC saving rates
Steve Webb
Director of Policy, Royal London

2. The (in)adequacy of DC saving rates
The implications of phasing
How much are people currently saving
The implications of the use of ‘qualifying earnings’
What will happen if current savings levels do not increase:
‘The Death of Retirement’
‘The Mirage of Flexible Retirement’
What can be done to increase savings rates
The role of employers?
The role of government?

3. 1. The implications of phasing
Mandatory contributions under AE legislation currently 2% of a band of ‘qualifying earnings’ – 1% from employee, 1% from employer
April 2018 rises to 5% - 3% (gross) from employee, 2% from employer
April 2019 rises to 8% - 5% (gross) from employee, 3% from employer
And then nothing…..
Note – these steps unlikely to lead to large-scale opt-outs because:
Coincide with pay rises for many
Tax relief and use of ‘qualifying earnings’ means net pay impact modest
Coincide with modest April income tax cuts as personal allowance rises
Inertia still important

4. 2. How much are people currently saving?
Source: DWP Automatic Enrolment evaluation report published December 2016

5. 2. How much are people currently saving?
In 2012, very few (around 1 in 20) private sector workers contributed 0-2% of their wages into a workplace pension;
By 2015 approx. one in three private sector workers contributing 0-2% into their workplace pension, representing an extra 3 million workers in this category
Around 45% of employees getting employer contributions of 0-4% in 2015;
Before Automatic Enrolment, typical combined employer/employee contribution rates:
DB: around 20%
DC: around 9%
Note – average DC pot with NEST currently c £500

6. 3. The implications of using ‘qualifying earnings’
Mandatory contribution rates only apply to a band of ‘qualifying’ earnings between £5,876 and £45,000. Table expresses “8%” mandatory contribution as percentage of gross earnings NB: AE review will consider continued value of ‘qualifying earnings’ – may recommend assessing from ‘first pound’ instead
Annual earnings
Full mandatory contribution as % of gross wage
£15,000
4.9%
£20,000
5.6%
£25,000
6.1%

7. 4. What happens if savings levels do not increase
4. What happens if savings levels do not increase? A) ‘The Death of Retirement’
Source: ‘The Death of Retirement’ – Royal London policy paper no 2 –

8. 4. What happens if savings levels do not increase
4. What happens if savings levels do not increase? B) ‘The Mirage of Flexible Retirement’
Source: ‘The Mirage of Flexible Retirement’ – Royal London policy paper no 11 –

9. 5. What can be done to increase savings rates a) the role of employers?
Big issue for employers of older workers following abolition of DRA
Workplace engagement can work:
Provision of workplace Advice can boost savings rates
Effective workplace communications can help (loo doors?!)
Availability of employer ‘matching’ contributions a positive incentive
Getting the defaults right is crucial
Nationwide – surge in employees contributing at maximum rate when default switched
Harness behavioural nudges
Heineken – ‘step up to the max’

10. 5. What can be done to increase savings rates b) the role of government?
Action already overdue (cf 17 year lead time from initial Turner Commission to full implementation of automatic enrolment)
Need to admit that 8% of qualifying earnings inadequate for most and ‘engagement’ unlikely to deliver on its own (cf last 50 years)
Compulsion politically difficult
Risk of opt-outs if mandatory 8% increased across-the-board
Therefore, need next phase of ‘nudge’

11. 5. What can be done to increase savings rates: ‘Automatic escalation’
Defaults and ‘nudges’ shown to be hugely effective
Evidence from US (eg ‘save more tomorrow’)
Coincide step up in contribution rates with pay rises – ‘you won’t miss what you’ve never had’
Statutory automatic step up in contribution rates when pay increases, with opt-out
Process stops when ‘realistic’ contribution rate reached – probably %, but “keep it simple”
Carry over attained contribution rate to new job via P45

12. Conclusions
Automatic enrolment great for improving coverage, but this is only phase 1
Current contribution rates if sustained could lead to the ‘death of retirement’
Urgent action needed to get contribution rates up to realistic levels – employers can play their part but legislation likely to be necessary
Behavioural ‘nudges’ have reversed a 50 year decline in workplace pension membership – need to build on that success