'Flexi-access pensions with 12% contributions could change the game'

Indeed, with Wimbledon on the horizon, nothing is certain until the last point of the match is played.

But if Labour forms the next government and starts its promised pension review, my fundamental question for its assembled bigwigs is how best to improve financial resilience, both for today and tomorrow?

Can anyone in financial services or indeed government square the circle of helping today’s cash-strapped workers with the need to provide more for their tomorrows?

My answer is to increase auto-enrolment pensions contributions for all and at the same time introduce an element of flexi access. Pension products are just too illiquid for the modern world. They need a touch of a spice.

Around one in five people in the UK has less than £100 in savings according to Royal London's financial resilience 2024 report. Unexpected financial emergencies, from losing your job, a broken gas boiler or even buying new school uniforms could tip anyone over the edge. 

Indeed, it is not just the precariat who struggle. Today, with sky-high interest rates, advisers find some of their clients are struggling, even on salaries of £100,000 with big mortgages and school fees to finance.

And their clients’ children and grandchildren sometimes don't have enough cash left over to get the savings habit – even opening a cash Isa is beyond them.

But there is hope. A total of around 20mn people save into workplace pensions provided by 2.3mn employers. A better pension with an element of flexibility could transform so many lives today and tomorrow.

Inadequate contributions

First things first. A quick win for the incoming government would be to simply implement the AE changes recommended in the 2017 review, seven years ago.

Indeed in 2023 the Pensions (Extension of Automatic Enrolment) Act 2023 gave the secretary of state power to reduce the lower age limit for AE and to remove the lower earnings Limit for qualifying earnings. These modest reforms have yet to be implemented. It has been a long wait.

Of even greater concern, 12.5mn people are under-saving for retirement, according to Department for Work and Pensions research; the legal minimum for AE contributions is still a miserly 8 per cent of qualifying earnings.

This figure, set more than a decade ago in 2012 and unchanged in 14 years, will not provide anyone a comfortable living standard in retirement or even £31,000 a year, a moderate pension in the eyes of trade body PLSA.

There is never a good time to increase the burden on employers. So, bite the bullet.

By law, employers currently contribute just a minimum 3 per cent of salary while employees pay 5 per cent (including tax relief). According to Nest, four in 10 employers offer no more than the minimum 3 per cent.

A further two in 10 employees work for an employer that pays the minimum legal pension contribution for some but not all employees.

To give people a chance to escape looming pensioner penury, the only viable solution is to increase the AE minimum contribution from 8 per cent to 12 per cent by the end of the next parliament.

There is never a good time to increase the burden on employers. In the past 14 years, we have had austerity and a pandemic. In the next decade, there may be greater challenges ahead. So, bite the bullet.

Whatever the crisis, there can be no more delay or procrastination. The government must grasp the nettle before it is too late.

Affordability for both employers and employees make this an admittedly prickly option. According to Nest Insight research, shortage of cash does not seem to be the overriding reason why employers do not voluntarily increase their pension contributions.

Admittedly, the legal minimum acts as a strong default for employers. They have complied with the law and that is enough.

Some employers just pay the minimum because it is not made easy for them to contribute more. Sheer 'computer says no' is a factor – astonishingly 20 per cent of employers were driven by the default setting in their payroll software or pension provider set up.

One in 20 say they did not know it was possible for an employer to contribute more than 3 per cent. Diverting a trickle of money (3 per cent from the employer) from pay rises to pensions may also have the added benefit of dampening down inflation. 

Pensions illiquidity is a killer

More of a challenge is the extra burden on employees. If millions of Brits do not even have £100 to their name, could they afford the rise in their pension contribution rate from 5 per cent to 6 per cent of pay? My answer is yes. Let them access their own money.

Opt-outs would not rise dramatically if everyone could have instant access to an extra 2 per cent from their new 12 per cent a month pension savings. 

Retirement provision often fails to reflect people’s real lives, living hand to mouth with one eye on the future for their children and their old age. Pensions need a tweak, not a massive redesign, to allow for short-term and long-term needs in one simple product.

A mandated 2 per cent savings sidecar as part a higher 12 per cent AE rate would dramatically improve pension prospects and give savers more resilience.

Pensions illiquidity is a killer in the continuing cost of living crisis, while pension tax law a dampener to innovation.

The extra 2 per cent would go in a short-term savings side car with instant access with easy opt outs for the 2 per cent savings element – no complicated forms to fill in, just a text 'opt out' (just for the savings element), when the minimum contribution rate rises to 12 per cent. And keep the main pension away from temptation. 

The Association of Consulting Actuaries and the Resolution Foundation are just two of many who have backed the idea. Savings sidecars work, as Nest Insight pilots show.

AE short-term savings sidecars for all 

Suez, a recycling specialist with 6,500 employees in the UK and 40,000 worldwide has already used an AE savings sidecar for just over two and half years, achieving outstanding results.

About 65 per cent of Suez’s labour force are manual workers, the other 35 per cent are support workers and lab workers on relatively low wages, including some who have never saved before.

Using opt outs rather than opting in workers was transformational; 53 per cent of Suez employees started savings on an opt out basis compared to just 1 per cent using opt in.

Their auto-savers have an average balance of around £130 in savings after four months, compared with an average balance of around £29 by opt-in savers. 

The government must grasp the nettle before it is too late.

Nest Insight has already carried out several trials of sidecar savings and opt-out emergency savings via payroll, conducted with the support of big financial hitters BlackRock, the Money and Pensions Service and the JPMorgan Chase Foundation.

There is proof the opt-out savings concept works. Why wait any longer?

As with Nest’s pilot, the concept uses existing AE payroll functionality. The sidecar in essence is just a new class of pension contribution. 

Adopted more widely, a mandated 2 per cent savings sidecar as part a higher 12 per cent AE rate would dramatically improve pension prospects and give savers more resilience.

People on the breadline could even just dip in their savings pot occasionally to have a jolly holiday or Christmas, free from debt. What’s not to like? 

Stephanie Hawthorne is a freelance journalist and former editor of Pensions World