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Raising auto-enrolment contributions too early will hurt long-term savings – PwC

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  • Raising auto-enrolment contributions too early will hurt long-term savings – PwC

UK - Increasing auto-enrolment contributions ahead of the 2107 threshold might hurt retirement savings in the long term, according to PwC.

The consultancy went on to say that a period of contribution stability would be more beneficial.

The comments follow on from recommendations in the Workplace Retirement Income Commission (WRIC) chaired by Lord McFall, which published its final report yesterday.

One of the suggestions for increasing retirement savings was to allow for an increase in auto-enrolment contributions of more than 8% before 2017, when a review of the soft compulsion legislation is required.

McFall's report recommended that the UK government work with employers and employees ahead of the review, which could lead to an "auto-escalation" of contributions.

Ed Wilson, director in PwC's pension practice, warned that increasing contributions in the current economic climate could lead to the opposite of the desired effect.

Echoing sentiments expressed by the Confederation of British Industry yesterday, as well as opponents to public sector contribution hikes in the past few months, Wilson said: "For a lot of individuals, they do not have spare family budgets. Having to contribute more would certainly put a cash flow strain on them - it would be very unwelcome and probably would disengage employees from this big issue."

He added: "A lot of the comment is expressed in the context of replacement ratios. I'm not sure that is the best place to start."

Instead, the issue should be looked at from the perspective of what various workers need for a level of comfort in retirement, Wilson said. 

An approach where people looked from the bottom up, taking both workplace pension savings and state pension savings into account, would be more useful.

"If you actually ask people what they want from pensions, it is interesting what comes out," Wilson said. "They highlight products that are easy to use and access, that are understandable - by that they mean products that are simple and transparent."

However, he argued that adequacy was not often an issue raised by employees, a fact he attributed to lack of long-term planning by workers.

"Employers have had more success where they have focused on issues such as workplace saving with shorter-term goals, rather than presenting the pension problem," he said.

He stressed that he would be "very keen" to allow for a transition period before further changes were made to auto-enrolment guidelines.

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