'Auto-enrolment has been a success but workers are still not saving enough'

It started with the biggest employers enrolling new staff into pension schemes, but quickly smaller employers came on board, and now even the ‘one-person’ employer – for example the parent employing a nanny – has to offer pension provision. 

On first glance, it has been a rip-roaring success. The Department for Work and Pensions' recent report "Analysis of future pension income" showed 10.8mn people have been automatically enrolled, and private pension participation has more than doubled from 42 per cent in 2012 to 86 per cent in 2021. That is a tremendous statistic.

However, that does not mean all pension saving problems have been solved.

Worryingly, the DWP also highlighted that a large proportion of people are still not saving enough for their retirement; more than two in five (43 per cent) are not expected to be able to afford an annuity that would meet a target replacement rate for an adequate income in retirement, which is 67 per cent of pre-retirement earnings for a median earner (assuming they took a 25 per cent tax-free lump sum as well). 

Despite signalling these plans the DWP has sat on its hands for the past six years.

Put simply, many more people are saving through AE, but they are just not saving enough.

The DWP is acutely aware of these issues, and as long ago as 2017 it pledged to change the AE terms. Two key changes were promised: lowering the age of AE from 22 to 18; and ditching the lower band of qualifying earnings, instead calculating contributions from the first pound of salary.  

Despite signalling these plans the DWP has sat on its hands for the past six years. Maybe because it wanted the right economic environment for employers and workers to increase contributions, maybe because it could not find the opportunity to draft the legislation. 

Whatever the reason, the DWP is now pushing forward.

Instead of a DWP-sponsored pensions bill, it is backing a private member’s bill brought forward by a Conservative backbench MP. This offers a different way of getting legislation done, but with the government’s backing that the bill should pass. 

If the bill is attacked – not impossible given it aims to divert money from pay to pensions at a time when many are struggling to heat and eat – the DWP can always subtly distance itself from the private member’s bill. The political risk is smaller, no screaming headlines of government U-turns. 

Although this development sounds positive, there is a catch. If the bill is successful, the changes become law, but the start date will only be set by the government when it deems the time is right.

Whatever the reason, the DWP is now pushing forward.

Before that happens, it has to report on current workplace provision and model the impact of the changes – for members, employers, and Treasury in terms of additional tax relief.

That review will scrutinise the impact on lower earners who will see more of their pay diverted to pensions, and the rise in staffing costs for employers.

Credit should be given to Laura Trott, the pensions minister, for getting to within a sniff of the statute book. But these changes to AE are not home and dry. 

The changes when they eventually happen should help some people. Lowering the minimum age to 18 will give some four extra years of saving, and we all know that the earlier you start, the better.

An 18-year-old starting to save 8 per cent of their £20,000 salary can expect a fund 13.5 per cent bigger at age 68 than someone who started four years later when their salary was £21,650*. 

Removing the lower earnings limit has the bigger effect, however. For the same 18-year-old, this could supercharge their pension fund by 45 per cent. Although plenty of schemes already calculate contributions on this basis – operating a qualifying earnings band is difficult in practice – so there are questions over how many people this will actually help.

AE has been a success in getting most workers saving. But they are not saving enough.

I believe there is still more the UK could do to improve pension saving. We should not rest on our laurels. Many believe we should aim for a 12 per cent contribution rate. There are other initiatives to consider.

One is bringing in a ‘save more tomorrow’ programme, where people can pledge on their next pay rise to also increase their pension contribution rate. This forward-looking commitment minimises loss aversion as take-home pay should not, in theory, decrease. This has been discussed for at least the past 15 years, but never initiated on a government level.

Introducing a new personalised guidance regime could make it easier to steer AE workers into increasing contributions, changing investment strategy or making better retirement decisions.

Better pensions engagement will help as well. Pension dashboards were in pole position to make seismic change in the UK, until the brakes were applied earlier this month. One day they should help people take ownership of their pension savings.

AE has been a success in getting most workers saving. But they are not saving enough. The DWP needs to steam ahead and expanding AE should be just the start.

Rachel Vahey is head of policy development at AJ Bell

* Calculations assume earnings and lower qualifying earnings band increase by 2 per cent each year, and that investments increase by 4 per cent net of charges.