When the government began the rollout of auto-enrolment (AE) back in 2012, only four in 10 people had a workplace pension. Marking 10 years of the initiative last autumn, the Department for Work and Pensions (DWP) released a report revealing that the overall participation in AE for eligible employees stood at 88%.
Considering this – as well as figures from December 2021 showing more than 10.6 million workers had been automatically enrolled and nearly two million employers had fulfilled their workplace pension duties – it’s clear that AE has been a big success in terms of the ambitions set out by the government at its inception.
However, while the positives of the project have been rightly lauded, nagging doubts are growing within the pension and benefits industries regarding the constrictions of the current AE regime.
Alan Morahan, chief commercial officer at Punter Southall Aspire, sums this up as the “thorny issue of adequacy”.
He explains: “There is wide recognition that the current mandated contribution levels are not sufficient to provide an adequate income in retirement for most people. Therefore, contributions need to increase and the government needs to set a timetable for future increases so that employers and individuals can prepare for them.”
There is, in fact, clear recognition of the issue within the halls of Westminster. “Current statutory contributions of 8% on a band of earnings are unlikely to give all individuals the retirement to which they aspire,” the government admitted in response to a work and pensions select committee report in January 2023. While there is a commitment in place to review minimum contributions, Russell Wright, senior vice president, DC and financial at Redington, is sceptical regarding the efficacy of a hike.
“The answer isn’t to raise automatic enrolment minimums now,” he insists. “In a cost-of-living crisis, people may well opt out because of financial necessity. The pressure this would place on employers would impact both wage rises and employment growth too.”
Wright believes the focus should be on short-term savings rather than retirement in the current climate. “Ask any financial adviser, and they won’t recommend putting more money into your pension if you haven’t got your immediate needs covered alongside a healthy rainy-day pot. Short-term financial resilience should provide you with the foundation you need for long-term planning.”
Wright cites “encouraging signs of success” from Nest Insight’s sidecar savings trial. Launched in 2018, the initiative creates a liquid ‘emergency savings’ account linked to a traditional defined contribution pension pot. Participating employers deduct contributions automatically through payroll in an attempt to create an optimal level of liquid emergency savings, while also increasing long-term savings.
“One lesson learnt from automatic enrolment is that, given the right framework and levels of compulsion, all employers can implement savings systems and employees tend not to opt out,” says Wright.
Ian Bird, a partner at Secondsight, agrees that the constrictions of AE could be addressed with more savings flexibility. “Allowing early access to pension pots in certain circumstances, or combining pension schemes with other investment methods, could help in retirement saving,” he explains. “For example, allowing savers to look across or combine with other investment vehicles such as ISAs may open up other tax benefits and convenience of access.”
However, in terms of changes to the AE regime, Bird believes the system works well so refinement, rather than overhaul, is in order. Among his suggestions for this is revisiting the minimum age that AE begins, which is currently 22 years. “This will encourage people to contribute to their pensions from their first earnings and give them the opportunity to add another few years in contributions,” he says.
Bird also believes the minimum income level (£10,000) could be reduced to aid those in lower earning ranges, and adds that widening the scope of the scheme to include the self-employed could be beneficial, particularly with the growth of the gig economy and zero-hour contracts.
The impact on women
So while the ‘one-size-fits-all’ aspect of AE is often criticised, closer inspection reveals its coverage doesn’t actually extend to ‘all’. According to Melissa Blissett, senior consultant – pay gap analytics at Barnett Waddingham, many of those losing out are women.
“Low pay is a gendered issue,” she insists, pointing out that women account for 69% of low earners and make up 74% of part-time workers, as reported by The Women’s Budget Group. All of this means that more women than men are likely to fall below the AE earnings trigger of £10,000. This is the case even if they work multiple jobs that exceed the threshold when combined in total.
“In essence, a key question is whether it is better to remove the earnings trigger, auto-enrol everyone and allow opting out, or maintain an earnings trigger, with the option for those falling below it to opt in if they want to,” Blissett suggests. However, she believes either option can only work with sufficient workplace engagement and education to inform workers of the best choices for their circumstances.
In any case, while the removal of the earnings trigger may go some way to improving outcomes for women, closing the gender pay gap would have substantially more impact, she concludes.
Blissett’s colleague at Barnett Waddingham, Mark Futcher, partner and head of DC, points out that a DWP review of AE in 2017 actually recommended the removal of the lower limit of the qualifying earnings band, as well as the lowering of the age threshold from 22 to 18. Whether the changes transpire in the mid-2020s, according to the government’s stated ambition, remains to be seen, but these are policies that Futcher endorses.
“It seems logical that at some point the lower limit of the qualifying earnings band is removed so everyone gets contributions paid from the first pound earned,” he says. “This will help the cohorts that need support with retirement saving the most. Lowering the age threshold to 18 also makes sense, as does a long-term ambition to increase contribution requirements.”
Futcher also acknowledges the need to strike a balance between workers’ short-term and long-term savings needs but believes people should seriously consider achieving the maximum employer contribution where matching structures are in place. “Employers may consider offering an ‘auto-escalation’ option, where contributions increase gradually over time with pay rises,” he adds.
Speaking from the employer’s point of view, Ian Hodson, head of reward at University of Lincoln, doesn’t see AE as constrictive in its current state but believes there could be value in the introduction of incentives towards financial education.
“For small employers, I would like to see a grant awarded to support education programmes or much more material made available to support the education piece,” he explains.
Solutions for savings
Hodson insists that the opt-in and mutual contribution principles of AE can – and should – be applied to other workplace savings schemes.
For example, University of Lincoln has taken part in a pilot scheme – monitored by both Nest Insight and the Money and Pension Service – to contractually enrol student workers into a workplace ISA where the organisation double-matches their contributions. Hodson says the initiative, which drew upon early findings from Nest Insight’s sidecar savings trial, has proved “extremely popular” and has “helped students to save thousands of pounds and utilise employer contributions as they were intended”.
Hodson also believes the completion of the long-awaited pensions dashboard project will bring much-needed visibility around personal savings – a point echoed by Saba Haran, VP benefits and pension & employee benefits for insurer Lockton.
“The pensions dashboard will help individuals to keep track of their pensions over time, as they can view up-to-date information about their savings, even if they move jobs or change pensions,” Haran explains. “This is particularly important for people who have multiple pensions from different employers, as it can be difficult to keep track of all their savings.”
So, if AE is too constrictive in its current state, more clarity will at least provide employees with the insight that something else must be done to prepare for their retirement. The challenge for employee benefits professionals – along with the government and financial services sector – is to help them find the right solution.