Auto-enrolment comes of age

Yes, auto-enrolment is five years old this month. Hip, hip, hooray, I hear you cheer from your offices across the length and breadth of the UK.

And yes, it is a birthday we should all welcome, because auto-enrolment is one of the few pension success stories of recent years.

Push aside for a moment the death of the final salary pension company scheme or the way in which a number of firms are now trying to wriggle out of expensive guarantees by linking pension increases to the Consumer Prices Index rather than the higher Retail Prices Index. It is auto-enrolment’s moment in the spotlight and we should acknowledge its impact on helping to kick-start the savings habit.

Auto-enrolment has got to age five covered in glory and not tarnished by scandal

The statistics make for good reading. Since 2012, 7.6m more people have been automatically enrolled into workplace pensions. More than triple the number of people who earn between £10,000 and £20,000 a year are now saving into a pension, compared to 2012. Sixty three per cent versus 20 per cent.

Want more? Okay. More than four out of five employees say they have heard of automatic enrolment. Since 2012, £405bn has been saved into workplace pensions, of which £119bn was employee contributions, £247bn was employer contributions and £39bn was provided by the government in the form of tax relief.

Finally, three-quarters of all employers support the policy of automatic-enrolment, while less than 10 per cent of eligible employees have chosen to opt out of the scheme (thank you the Pensions and Lifetime Savings Association for providing me with all these numbers – I hope you found them as fascinating as I did).

So, auto-enrolment has got to age five covered in glory and not tarnished by scandal (unusual in the world of pensions). Time to relax and let it continue on its merry path?

No way. Although auto-enrolment has ‘bullied’ (in the nicest possible way) millions of workers into thinking about long-term investing for the first time in their lives, it is only the start. Unless this new pension regime adapts and builds on the great start it has made, it will be no more than window dressing. What we now need to do is encourage people to save enough to ensure a financially secure retirement.

It is a sentiment shared by others, including the almighty Association of British Insurers, which is now calling for the government to widen the auto-enrolment net to help evenmore people start saving for the future. The government is currently undertaking a review of auto-enrolment to make it fit for purpose.

For once the association speaks a lot of sense, and I hope those involved in the review process take its suggestions on board.

I cannot argue with its recommendations for adapting auto-enrolment to make it more inclusive and meaningful (in terms of encouraging workers to invest enough to keep the financial wolves at bay during retirement).

There are a number of the bugs in the system, it says, that should be addressed. For a start, some 4.8m self-employed workers should be embraced within auto-enrolment as a matter of urgency.

This could easily be done through the self-assessment tax regime. I agree 100 per cent.

Also included should be those who hold down multiple jobs and a big chunk of the 250,000 workers who do not earn enough (less than £10,000 a year) to qualify for auto-enrolment.

Absolutely.

The ‘qualifying earnings’ on which auto-enrolment contributions are based should also be re-assessed. They should be widened so more money ends up in workers’ pension pots.

One statistic on this very point caught my eye, provided by pension provider The People’s Pension. Come April 2019, someone earning £10,000 a year may think they are contributing the equivalent of 8 per cent of pay under auto-enrolment. But because of qualifying earnings, it will be just 3.3 per cent. For someone earning £20,000, it will be 5.65 per cent.

The last reform is probably the most contentious – and that is what the contribution rates should be after 2019. Should they then be increased beyond an overall 8 per cent? The Association of British Insurers says 8 per cent of a proportion of earnings is ‘not enough for most’ without stating at what level the overall contribution rate should be pushed up. Most experts suggest a future contribution rate of between 13 and 15 per cent.

How that will go down with employers – and workers – remains to be seen. It could be a difficult one, especially if the country is not in the good financial shape Brexiteers such as Boris Johnson believe it will be in as we walk away from the EU. Employers will see it as yet another cost to absorb. Some hard-pressed workers may view it as a form of tax on their take-home pay and decide to opt out instead.

In conclusion, so far so good on the auto-enrolment front. But it is a project that is a work in progress. Good foundations have been laid. The next steps are going to be far trickier.

Jeff Prestridge is personal finance editor of the Mail on Sunday