Why auto-enrolment is bigger than the pension reforms
People are known to follow a trend, so it should come as no surprise that there is more hype surrounding pension reforms than auto-enrolment, the more important of the two reforms, has garnered.
Having come into effect this April, the reforms are looking to have a sizeable and immediate effect on clients and advisors alike. From the media coverage pension freedoms have won, it would seem they represent the largest financial change in recent years. Beyond the hype, however, lies a different story: though its effects may seem less immediate, auto-enrolment is by far the more vital reform.
The Office for National Statistics estimates the UK population aged 53-65, those set to benefit from the reforms, at around 10 million. The number of pensioners with an occupational or personal pension is approximately 79%, as reported by think tank the Pensions Policy Institute.
If this trend remains with people approaching retirement, around 8 million will be able to capitalise on the pension freedoms over the next two years.
Limited market
Although 8 million is a huge figure, in reality many will have occupational schemes where retaining the status quo is more appealing, while others may have smaller pots with more limited options.
If, in a generous estimate, we assumed the pension freedoms will affect all 8 million for the next few years, this figure would still be overshadowed by the impact of auto-enrolment within the same timeframe.
The Department for Business, Innovation and Skills reports that both medium and smaller-sized businesses, employing 15.2 million people collectively, remain largely uncompliant with auto-enrolment regulations. Currently excluding employees of younger businesses, the figure is set to rise long term.
A portion of the 15 million may opt, or not be enrolled at all, yet it is still likely the reforms will affect them at some over the course of their working lives.
Ordering priorities
Although there is no clash between the impacts of auto-enrolment and pension freedoms, there has been a recent assumption that the greater challenge for the profession is helping clients with the effects of pension freedoms. Auto-enrolment’s success is also prematurely assumed, with larger employers having successfully complied with reforms.
Once again, the figures tell a very different story: auto-enrolment has far greater potential to attract considerably more people than the latest pension freedoms, throughout the next few years.
Not only do the numbers reveal the 15 million employees as yet unaffected by auto-enrolment, they additionally indicate that minor to moderate-sized employers have much to do to prepare for the reforms. Advisors could make a genuine difference in response to this increasingly pressing need.
It is down to individual advice firms how they choose to help business owners with auto-enrolment, if they decide to at all, but it is worth noting the significance of the opportunity, irrespective of pension freedom variety.