Claire Finn: It’s all about the contributions

The DWP’s review of auto-enrolment should not forget that contribution levels are the biggest influence on retirement outcomes says Claire Finn, head of DC & strategic partnerships, BlackRock EMEA

Claire Finn, BlackRock
Claire Finn, BlackRock

Retirement can feel like a complex subject to employees – but there’s a very simple way to think about it. The goal of retirement saving, after all, is to accumulate enough wealth to finance your old age.

Whether for you or a client, think of this equation: Take your contributions over time, multiply them by your investment returns, subtract costs, and you’re left with a retirement ‘outcome’, or pension pot. That outcome will be more or less successful for someone’s retirement needs depending on how those factors – contributions, returns, costs – combine over time.

Each of the factors is important in its own way, but we believe that pension contributions are the most important. It sounds obvious: if you don’t contribute, even the best investment returns can’t deliver the best retirement outcomes in isolation.

In fact, a study in the US recently showed that 68 per cent of an average American saver’s eventual retirement wealth is attributable to savings, with 38 per cent down to investing and 6 per cent negatively attributable to fees. This study, which ran simulations using historical data, found that “to get ready financially for retirement, the foremost force is rigorous savings on a persistent basis.”

That’s a big reason why we welcomed the introduction of auto enrolment in 2012. The first, and most important step any individual can take is just to start saving. On that measure, AE has been a huge success – there are 7.1 million more people saving for retirement in the UK as a result of it.

So with the Department for Work and Pensions (DWP) looking at how to build on the initial success of AE, there are a number of key messages we think should be taken forward.

Firstly, AE should be extended, especially to the self-employed. We believe that it’s essential to encourage as wide pension coverage as possible. AE is great for salaried employees, but it’s still too hard for self-employed and seasonal workers to save into pensions.

Unfortunately there’s no single solution to this problem. We put forward a number of suggestions as to how the self-employed could access existing pension solutions, such as via a partner’s company scheme or by continuing contributions to a company scheme after going self-employed.

Secondly, we need better ways to engage people at work. People spend most of their time at work, making this the ideal place to get involved with pensions.

But how do you get people interested? Online tools could help, but only if they come with encouragement and support, as well as guidance on all the choices offered.

Government occupies a unique position here, and should support the development of consistent member communications by employers.

After all, workers move jobs much more often nowadays, and nearly 5 million of us are self-employed. A clear and simple message across employers could encourage workers in these groups to save more.

Thirdly, an increase to contributions is necessary if savers want to hit goals. We welcome AE, but the programme really needs to come with an honest debate on the contribution rates needed to satisfy future income needs.

The current trajectory of AE towards 8 per cent contribution is a great first step, but it will not allow people to build up sufficiently large pots to provide an adequate replacement income in retirement.

So what can be done? We support auto-escalation techniques such as the “Save More Tomorrow” schemes used in the US that gradually increase employee contributions to levels closer to the DWP’s own recommended saving levels of 12-15 per cent in the medium term. Employers could also think about clever ways to incentivise saving – for example, offering a 0.5 per cent match for each 1 per cent contributed. This would mean someone needing to save, say, 8 per cent, to receive their full match of 4 per cent.

Then there is the issue of tax relief. BlackRock’s Investor Pulse survey shows that there is widespread confusion on how the current system of tax relief for pension savings works. It’s a convoluted system, and we believe a simpler format such as “Buy three, get one free” format would help provide effective incentives to save for retirement.

Overall this review is a great chance to fine-tune an initiative that is already helping to shore up the nation’s finances. If we are all going to save enough to enjoy retirement, we’ve got to get the legislation right and make sure as many people as possible are benefiting.