73% of employees with a workplace pension say they agree with the statement “If both I and my employer increased the amount of money we saved into my workplace pension each month, this would be a good thing for me”. Just 6% disagree; the rest are either neutral or say they don’t know.
That was the headline finding from an Ipsos Mori poll commissioned by the Department for Work and Pensions (DWP). More intriguing than the answer is why the DWP asked pollsters to ask the question (which they did in March and April, though results have just been published). Did it just want to gauge how employees might react when statutory minimum default contribution rates increase in April 2018 and again in April 2019? Or was it trying to fend off a perceived threat to this timetable?
The phasing in of minimum contribution rates has been pushed back repeatedly – by the Labour Government in 2009, by the Coalition Government in 2011, and by the Conservative Government in 2015.
Postponing increases to employee pension contributions means less tax deferral. Less obviously, if employer pension costs affect pay settlements, holding them down can lead to income tax being paid now rather than later and National Insurance now rather than never. It’s conceivable that HM Treasury might consider repeating this trick in the Autumn Budget, as a way of boosting short-term revenue projections. If so, it might argue that real wages are still below their levels at the start of the financial crisis; this is not the context in which it was originally envisaged that contributions would rise.
Writing in City AM¸ Secretary of State for Work and Pensions David Gauke said his department’s research showed that “far from seeing their pension as a cut from their pay packet, people are seeing the benefits that the saving will bring them in the long term”. That could be seen as a pre-emptive rebuttal of arguments for a go-slow based on living costs. Of course, all polling results are sensitive to the question asked. Respondents to the DWP survey weren’t told what the effect of higher employee contributions would be on their take-home pay (for example, just over £25 a month from this April for someone earning £25,000 a year) or asked whether they’d prefer a pay rise to a higher employer pension contribution.
No one will face a compulsory increase in pension contributions: employees can opt out or, where scheme rules allow, continue contributing at their current levels. Rather, changing the default matters because people tend to stick with the default. (How many of the 73% saying it would be good if they and their employer paid more could achieve precisely that via a matching contribution scale already available to them?) When default contributions rise, many will take the path of least resistance; this does not mean that the loss of purchasing power is not felt any more than it means that the pension contribution is not valued.
In launching automatic enrolment, the DWP’s approach was “first get people into pensions, then worry about how much they’re contributing”. That successfully transformed pension participation, but may have allowed people to feel comforted that their retirement provision could be sorted without them having to forgo much current income. Higher default contributions will inject a bit more painful reality – assuming they go ahead on time.