HC1494 Work & Pensions CommitteeWritten evidence submitted by Association of British Insurers (ABI)

The ABI

The ABI is the voice of insurance, representing the general insurance, investment and long-term savings industry. It was formed in 1985 to represent the whole of the industry and today has over 300 members, accounting for some 90% of premiums in the UK.

Executive Summary

1. The ABI welcomes the opportunity to contribute to the Work and Pensions Select Committee’s inquiry into automatic enrolment in workplace pensions and the National Employment Savings Trust (NEST). The ABI has been a strong supporter of automatic enrolment into workplace pensions for a number of years. We believe automatic enrolment will be a social revolution for retirement savings, and offers a once-in-a-generation opportunity to develop a savings culture in the UK.

2. One of our outstanding concerns after the last election was resolving the interaction between pension saving and means-tested benefits to take away the disincentive to save for retirement. We are therefore very encouraged by the DWP’s Green Paper on the State Pension which sets us on the path to a flat-rate, simple state pension which minimises disincentives to save.

3. We had also argued that while automatic enrolment is necessary, it is not enough on its own to create a savings culture in the UK, but that we need to bring about a behavioural change to get people to save more into their pension scheme. To achieve this, we had urged the Government to undertake a mass information and engagement campaign about the need to save. We are therefore very pleased that the DWP has secured funding to run a communications campaign on automatic enrolment.

4. The pension consensus that has produced these reforms has been hard won and must not be derailed or delayed. The key elements (automatic enrolment, employer contribution and flat-rate state pension) are or will be in place. The key now is to implement the reforms and allow them to bed in. This requires the Pensions Bill to receive Royal Assent as soon as possible in the autumn. The DWP is also currently consulting on the secondary legislation and guidance implementing automatic enrolment. We are working very closely with DWP to ensure the detailed rules are as practical and straightforward to implement as possible.

5. There are also strategic challenges for the pension landscape beyond automatic enrolment. The DWP consulted on the differences between trust-based and contract-based pensions earlier this year and rightly decided to take forward the issue of small pension pots through a Green Paper in the autumn. The industry will in turn explore how consumers can be supported to consolidate their pension pots from different employments as this can be very beneficial to their engagement with retirement savings.

Answers to Questions

DWP’s communication strategy for introducing automatic enrolment and provision of advice and support to employers and employees

6. Automatic enrolment alone is not enough to overcome the behavioural barriers to long-term retirement savings. Therefore we are very pleased the Government will run a communications campaign on automatic enrolment, which should help bring about a cultural shift in people’s attitudes to saving. This will include TV, radio, press and on-line advertisements currently scheduled to start from January 2012. The three key messages for individuals, which we fully support, are:

You could have 20 years in retirement.

State Pension covers the basics, but most need to save more.

A hassle-free way to start a workplace pension is on its way, through automatic enrolment.

7. A further strand of the DWP’s strategy for communicating with individuals is a drive to simplify the language used in pensions. We therefore welcome the publication of the DWP’s “Automatic enrolment and pensions language guide”, which builds on the NEST phrasebook and the ABI jargon buster launched in January 2011. We will work with the Department for Work and Pensions to establish how the industry can support this communications effort.

8. The establishment of the Money Advice Service, the annual financial health check initiative and related efforts to increase financial capability are also important factors to ensure people are clear about the need to save for their retirement.

9. The role of employers is also key to make automatic enrolment work, and they must be included in the communication efforts.

Arrangements for phasing and staging the introduction of auto-enrolment

10. These decisions have been taken and we have no comment to make. If employers want to start early or pay the full amount from the beginning, this should be encouraged.

Likely impact of auto-enrolment on business, especially small and micro-businesses

11. The representative bodies for smaller businesses are best placed to discuss the impact, especially in financial and administrative terms. Auto-enrolment will undoubtedly impose an unprecedented range of obligations an all employers. Two-thirds of employers have fewer than five employees,1 and very few of these are likely to have had any experience of pension provision. TPR has developed useful resources to help employers comply with their duties, including online tools and detailed guidance.

Role of The Pensions Regulator, including in certification of schemes

12. The Pensions Regulator (TPR) will supervise employer compliance with the new employer duties, and have started a drive to educate employers about them. Their role in supervising employer compliance includes the certification regime. TPR have made available summaries, checklists and detailed guidance to support employers with their new duties. TPR must ensure that it does not only regulate, but that it works with and encourages employers, particularly those small businesses who are new to pensions.

13. More broadly on certification, we have worked closely with the DWP and other stakeholders to ensure that the certification model preserves and encourages existing schemes, while being fair to scheme members. As a consequence, the certification regime now contained in the secondary legislation will safeguard one of the most important aims of the pension reforms - to protect existing good quality pension provision.

Estimated opt-out rates, including the possible impact on NEST if the numbers auto-enrolled are significantly lower than predicted

14. Automatic enrolment will deliver a major boost to pension savings, with the Pensions Policy Institute forecasting2 a significant increase in the number of people saving in a pension – to around 22 million by 2015. The pension industry is therefore fully supportive of, and optimistic about, this policy initiative.

15. But research3 also shows that while 65% of consumers said they would stay in a scheme if automatically enrolled tomorrow, (including 31% who said they would definitely stay in), 20% anticipated definitely or probably opting-out, with over half of respondents in this category (54%) citing that it would be unaffordable for them to participate in the scheme. This presents the biggest challenge to the effectiveness of auto-enrolment.

16. For auto-enrolment to successfully overcome these challenges, it will need to be accompanied by a mass communication campaign to increase people’s awareness that is in their best interest to save. As we said before, we are therefore very pleased the Government will run a communications campaign to start addressing this. The move to a flat-rate state pension will also be helpful here, as it removes disincentives to save and therefore a reason to opt-out.

17. It is our understanding that the modelling for NEST has been undertaken on the basis of a wide variety of scenarios for the number of auto-enrolled people. This, together with the communication campaign, should ensure that NEST will be able to cope if the number is lower than predicted.

18. Employers will also have a very important role in encouraging their employees to stay in or at least not encouraging them to opt-out.

NEST’s potential market share and the possible effects on other providers

Likely impact of the limitations placed on NEST, including the contributions cap and the ban on transfers

19. NEST’s role is to offer a pension scheme to any employer who requests it. As a result of this universal service obligation, it benefits from state aid to fulfil this obligation. It has also been explicitly set up to complement, rather than replace, existing pension provision. We continue to strongly believe that the NEST contribution limit should remain in place to ensure NEST is only serving its target market of low-to-moderate income earners.

20. Some commentators argue that the contribution cap and the ban on transfers on NEST should be lifted now so as not to impose any strictures on employers who might be using NEST but whose pension contributions exceed the NEST cap for some employees. It is true that the contribution limit prevents employers from using NEST for highly paid staff, or for medium paid staff where they want to make more generous contributions than 8%. But this shows that the contribution cap is effective – it keeps NEST focussed on its target market.

21. This is right because NEST benefits from state aid. The annual contribution limit and transfer ban were key conditions for the industry to support state aid being granted to NEST. Ultimately, NEST is a new entrant to the pensions market with a Government subsidy. The private sector would be unable to secure finance on the same terms. Removing the contribution limit would therefore put NEST into direct, unfair competition with the private sector. With that, it would also impact on the case for state aid to finance NEST.

22. We strongly believe that to ensure the success of automatic enrolment, providers and employers now need certainty about the framework under which they will operate and which they will be expected to comply with. There are a number of outstanding questions on the interpretation and implementation of the secondary legislation, which need to be clarified. These issues should be addressed as a priority so that there is certainty about the framework, rather than reopening debates on settled policy areas, where there is no evidence to support doing so.

23. More broadly, the NEST contribution limit has already been extensively debated, a consensus was reached and a policy decision made. We do not believe that there is any evidence to show that the policy reasons or the environment have changed, which would mean transfer ban and cap should now be removed.

24. Instead, the announced reforms to the pension framework should be allowed to bed in. This will allow NEST to adjust to the market and vice versa, before any further changes are made. Changes to the regulatory framework should be considered as part of the 2017 review of the current reform programme.

Whether auto-enrolment is likely to attract new providers and encourage new models of provision

25. It is likely the UK market will see new pension providers who may also bring different models of provision. For example, Danish provider ATP has opened an office in the UK, and is reported to hope to unveil a UK pension platform ahead of the roll-out of auto-enrolment in 2012. Dutch provider APG has also expressed an interest in entering the UK market.

NEST’s investment strategy

26. We believe NEST’s investment strategy, which is based on robust member research is appropriate for the target market, and NEST’s seven evidence based investment beliefs are sound principles to provide a framework for consistent decision making.

Possible measures to reduce the proliferation of small pension pots

27. In our response to the DWP’s Call for Evidence on the differences between trust-based and contract-based pensions earlier this year, we argued that the issue of small pots needed to be addressed as a priority. We are therefore very pleased that the Select Committee is considering it, and that the DWP will publish a Green Paper in the autumn which will focus on small pots.

28. The ABI believes consumers need help to build up greater pension savings during their working life. Small pots create significant problems for consumers, and the number of people affected by these problems will grow as a result of auto-enrolment. Many people currently end up with several small pension pots. They often find it complicated and expensive to combine multiple pots, and may find providers and trustees unwilling to accept transfers in. It would be beneficial to consumers if their small pots could be transferred into their pension pot in their new employer’s scheme. Benefits would include:

Reduced risk of member and scheme losing track of each other.

A larger single pot at retirement will give access to a greater choice of retirement income options, and avoid the problem of “stranded pots”.

A greater member appreciation of building up a pot of savings over their working life, potentially creating greater engagement with savings.

29. The industry will therefore explore how consumers can be supported to consolidate their pension pots from different employments as this can be very beneficial to their engagement with retirement savings. This could also bring benefits for providers. Providers of contract-based pension schemes already have to administer large numbers of small and unprofitable pension pots because of the immediate vesting rules. This will become a bigger problem with the arrival of automatic enrolment, with DWP estimating that 200,000 new small pension pots will be created every year.

How self-employed people, and part-time, temporary, casual and agency staff, will be treated under auto-enrolment; and the equality implications

30. Employer duties, including the duty to automatically enrol, do not apply to self-employed individuals or an individual who is the only person in a company, of which they are also the director. Self-employed individuals and single person directors can however join NEST as individual members.

31. Under the pension legislation, a worker is an individual who works under a contract of employment and is not undertaking the work as part of their own business. The Pensions Regulator’s guidance states this definition may include agency workers. Regarding part-time, temporary and casual staff, and employers need to look closely at the work arrangements to establish if the individual is a worker.

32. The most likely type of workers to not fully benefit from auto-enrolment and therefore become at risk of under-saving are workers who; have several (low-paying or part-time) jobs under the auto-enrolment threshold, change jobs often (and therefore have to frequently opt-in during the first three months of employment), or those who decide to opt-out of auto-enrolment.

33. In all of these scenarios, the focus must return to motivating the individual to take responsibility for their retirement savings in the first instance. We are therefore very pleased about the DWP’s awareness campaign about the need to save. As lower earners alongside the self-employed have historically been under-pensioned, it is particularly important that they are included in the DWP’s campaign.

The extent to which auto-enrolment is likely to achieve the desired behavioural change in terms of encouraging people to make provision for retirement

34. Automatic enrolment alone is not enough to bring about the desired behavioural change. Again, as stated above, for auto-enrolment to successfully overcome the behavioural barriers to long-term retirement savings, it needs to be accompanied by a communication campaign to increase people’s awareness that it is in their best interest to save. The ABI is very pleased the DWP has secured funding for such a campaign.

35. We also believe that it will be important not to let 8% become a new social norm, where people think they have “sorted out” their retirement income needs once they are auto-enrolled into a workplace pension and the 8% contribution is going into their pension pot every year.

36. We therefore believe additional behavioural techniques should be explored. For example, employers could be encouraged to promote a model of contributions auto-escalation for their employees as soon as the steady state is reached in 2017. This would enable contributions to continue to rise, perhaps matched by employers. This could also take the form of “save more tomorrow”, which allows employees to sign up to raise their pension contribution whenever their pay increases. This technique (developed by Richard Thaler) yielded dramatic results in the US where the average savings rate more than tripled, from 3.5% to 11.6%, over the course of 28 months.4 We believe that this is transferable to the UK, because the technique addresses loss aversion, inertia and self control, all universal psychological obstacles to saving.

37. Similarly, using behavioural finance techniques, people could be given a choice to increase their employee pension contributions to 4%, 6% or 8% once the steady state is reached. This presentation should lead them to go for the middle increase of 6% because of the way decisions are influenced by how choices are presented. It would be another way to encourage higher contributions than the statutory minimum.

38. Finally, it could also be explored whether to gradually increase the statutory minimum from 8% to say, 11% or 12%. The Australian Superannuation Scheme is an example of this: there, the rate will be increased very gradually from 9% over six years, with initial increments of 0.25%, followed by further increments of 0.5%, until 2019, when the rate reaches 12%. However, such increases would of course need to ensure that consumers are not discouraged from saving by spiralling contributions and opt-out of pension savings, and they would also need to work with the economic cycle.

26 August 2011