Opinion  

More than a decade on from auto-enrolment, the majority are under-saving for retirement

Rhiannon Barnsley

Rhiannon Barnsley

Times are strange. 'Crisis' seems to be a fitting word for what is happening right now.

As inflation hovers around 10 per cent, the cost of living is certainly impacting many people – pension reform is understandably not what most people care about right now.

You can forgive them for that – why worry about your retirement in potentially 20 plus years when you are worried about being able to afford your mortgage right now?

Article continues after advert

The trouble is times are tough now, but they have been tough for a while. The pandemic had a major impact on people, and now as we seem to be emerging from that we have been dealt another blow.

The problem is the government will always have a reason as to why it is not the right time to look at the current auto-enrolment regime and whether it is fit for purpose.

The truth is, most people with defined contribution pensions are not going to be retiring when they would like to, or if they do retire, will find they will not be living the lifestyle they hoped for. 

Auto-enrolment is something that affects millions of working adults in the UK, particularly since inadequate retirement provisions that fuel pension poverty are becoming increasingly prevalent.

A bleak outlook

Regrettably, more than a decade on from the introduction of auto-enrolment in workplace pensions, the majority of these people are under-saving for retirement, or worse yet, are not even within the scope for it.

The minimum contributions an employer needs to make in respect of an employee that is auto-enrolled is around 3 per cent of their annual salary, so long as the employee contributes at least 5 per cent of their annual salary. This is not a big number.

A contribution of 8 per cent of annual salary is not enough to achieve the type of pension most employees would like.

Add to this that the legislation steers organisations to base contributions on what is known as 'qualifying earnings', which currently is £6,240-£50,270. This means for most employees contributions are not even based on their entire salary. 

This outlook only gets bleaker when comparing the typical levels of return from DC pensions and the more generous defined benefit alternative.

It is now rare for a private sector employee to find themselves in a DB scheme, but those in the public sector still benefit from these.

As a comparison, the typical employer contribution for these schemes could be equivalent to 15 per cent to 25 per cent of annual salary. A bit of a difference.  

For those that are not in scope for auto-enrolment, they do not even get to benefit from what are essentially 'free' employer contributions.

People who currently do not benefit from auto-enrolment include those under 22 years and those earning less than £10,000 a year. Students with part-time jobs and those with multiple jobs are affected by these requirements.