As automatic enrolment reaches its 10-year anniversary, many commentators will be talking about its success. The numbers speak for themselves, with over 10 million people added to workplace pensions, boosting participation from around 55% in 2012 to 88% in 2021.
What’s seldom mentioned is the reason for this success. In essence, we tried a similar workplace pension product in 2001 in the form of Stakeholder Pensions. While this brought some benefits in establishing the infrastructure, it did little to improve take-up as it required action on the part of employees to join. Automatic enrolment solved this problem by removing any need for employees to take action.
Effectively, we moved from ‘opt-in’ in 2001 to ‘opt-out’ in 2012. That was transformative.
But there’s more to do if we truly want to help people save adequately for retirement, and for them to see the value in doing so. Virtually everyone with an interest in the subject agrees with this basic ambition.
Royal London carried out research1 earlier this summer to understand what people thought of their retirement prospects, and we asked for views from employers and advisers who are running workplace pensions.
Notably, the success of automatic enrolment is not matched by the confidence of employees in their ability to fund their later years. Only 16% of respondents suggested they were very confident that the amount they are currently saving is sufficient to provide income for the duration of their retirement. 27% said they were not very confident and 10% weren’t confident at all.
So, there is more to do, but we can build on a very positive start.
Following our research, we make three specific recommendations:
- Implement the proposals agreed in the 2017 review, reducing the minimum age from 22 to 18, and removing the lower earnings limit from contribution calculations.
- Set out a clear plan for improving adequacy of contribution rates over time.
- Conduct a holistic review of education and engagement in later life saving and pensions.
It may seem odd to suggest such steps in the middle of a cost-of-living crisis when people are struggling to get by in the here and now, never mind saving for later. It’s clearly right that we need to prioritise the immediate challenges we all face. But today’s crisis is instructive. The population is ageing, and the cost-of-living challenge in future could prove much more profound and far more difficult to resolve than the problems we face just now.
Imagine a third of the UK’s population ceasing work with inadequate incomes. Quite apart from the problems this creates for those people at a time of life they should be able to enjoy, it places a huge burden on the State. On the taxpayer; the working population.
We should, at the very least, have a plan for how we improve people’s retirement prospects further to avoid a bigger crisis in the years ahead. Over a decade passed after the lessons learnt from Stakeholder Pensions before automatic enrolment was introduced. That’s now over two decades, and it may take another one to make further changes.
The cross-party consensus that was forged to deliver automatic enrolment needs to be reinvigorated to deliver further change over successive governments.
And if the pandemic and subsequent cost-of-living crisis are teaching us anything, it’s that we need to do more to help people become more financially resilient. If the ‘nudge’ of automatic enrolment was so successful getting people saving for retirement, what can we consider for other essential aspects of financial resilience. Starting to save into a workplace pension sits comfortably with starting a new job, but there may be other life events, such as buying your first house, getting married or having a child, which lend themselves to different types of financial protection.