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

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?

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

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.

We should be encouraging young people to start saving for retirement as soon as they can.

For those people entering the workforce at 18 years old on a salary of more than £10,000 a year, they will have to wait four years before receiving any pension contributions from their employer. 

Employers can choose to enrol these employees and make contributions in respect of them, but there is no obligation to do so. 

Reforms needed

There have been calls to extend the scope of auto-enrolment. The Automatic Enrolment Review 2017 recommended that auto-enrolment be extended to include those aged 18-22, and that the lower qualifying earnings threshold be removed.

The Conservative MP Richard Holden introduced a private member’s bill laying the groundwork to introduce reforms echoing the 2017 review.

A second reading of the bill is scheduled for November, subject to sufficient parliamentary time being allocated. Time will tell if the bill progresses. It has already been halted once.

For those who argue that now is not the time, auto-enrolment is about choice, not coercing employees to save for retirement.

Employers cannot know the circumstances of each employee, but if auto-enrolment was extended, everyone could choose whether to opt out of auto-enrolment – therefore opting out of the free employer contributions.

At the moment, the choice is made for 18-year-olds and those who do not earn more than £10,000 a year.

Something about the lack of choice does not seem fair, does it?

Rhiannon Barnsley is an associate at Arc Pensions Law.