The Department for Work and Pensions (DWP)’s latest statistics looking at workplace pension participation and savings trends are certainly a good place to start.
As warrants such a large social experiment, auto-enrolment was rolled out gradually. Starting off with the larger employers, moving to small and medium employers, and over the past couple of years ending with micro employers.
To get a decent income in retirement we need people to stick with the savings habitContributions started off at 1 per cent member and 1 per cent employer. And although they edged up slightly last April to 2 per cent employer and 3 per cent member, they will rise again next year to their final (for now) level of 3 per cent employer and 5 per cent member.
Self-employed pension participation
The DWP’s latest statistics measure participation up to April 2017 – before the latest contribution increase kicked in. Although fears were expressed at the time, anecdotal evidence suggests the increase has not had a material effect on participation rates.
Key points
- DWP statistics show that despite the rise on contribution rates for auto-enrolment there has been no impact on participation rates
- The average an eligible saver puts into a private sector scheme is less than half of that put in by a public sector worker
- During the past 10 years, the number of self-employed people saving in a pension scheme has more than halved from 30 per cent to 14 per cent
The good news is auto-enrolment has boosted the numbers of people saving. Overall, 84 per cent of eligible employees now participate in a workplace pension. The figures for public sector schemes are, as expected, higher than private sector schemes (92 per cent versus 81 per cent). This is an incredible change compared with the days before auto-enrolment, when private pension scheme membership had slumped to 55 per cent in 2012 – only 10.7m employees.
However, a snapshot of participation tells only part of the story. To get a decent income in retirement, we need people to stick with the savings habit and to save sufficient amounts.
Let’s look first at whether people are saving persistently.
This information is gathered by the Office for National Statistics (ONS) in its annual survey of hours and earnings (ASHE), which defines persistent savings as eligible employees saving into a workplace pension in at least three years out of four. An eligible employee can disappear from the cohort either through changes in their eligibility status, stopping saving, leaving the labour market, or moving to an employer who does not return the ONS questionnaire.
The percentage of persistent savers fell in 2017 to 73 per cent (from 77 per cent the previous year). But the ONS is unable to say that this is definitely because of an increase in non-persistent savers – more that they struggle to capture the right data. So although we cannot currently call this out as a problem, it may be one to keep an eye on.
The data on the amount people save is clearer. The annual amount saved increased by 5 per cent in 2017 to £90.3bn, and the bulk of this was increased savings in private sector schemes.
A more interesting picture is painted by looking at the average amount saved per person. In public sector schemes this was £8,414 in 2017. However, the average an eligible saver puts into a private sector scheme is less than half of that – only £3,873. More pertinently, this figure is falling, and is almost 40 per cent lower than it was 10 years ago (£6,206).
This can be explained by the spike in the number of pension scheme members under auto-enrolment who are only saving very small amounts. So naturally, the average falls. However, this glib assertion glosses over the fundamental point that the success of all pension schemes rides on how much money people and employers save. Put bluntly, the more money saved, the bigger the retirement income will be.
The two contribution rises (one that already happened and the one planned for next April) will improve the averages significantly in the future. But the question remains whether 8 per cent of band earnings is enough. And most commentators agree it is not.
In its auto-enrolment review last year, the DWP promised to remove the lower band so that contributions would be calculated from the first pound of a worker’s pay, but there is no firm date yet for this change.
The tricky issue of raising contribution rates was not tackled. Although there is never a good time to introduce this with employers and employees, the longer contribution rates remain low, the more people will lose out on decent retirement incomes.
The other significant blemish on the horizon is that although a quiet revolution is happening to employees’ pension saving habits, the same is not true for the self-employed. Over the past 10 years, the number of self-employed people saving in a pension scheme has more than halved from 30 per cent to 14 per cent.
The self-employed have so far been excluded from auto-enrolment. The 2017 Conservative Party manifesto promised to make auto-enrolment available to the self-employed, but instead the government is looking at methods to nudge these people to save.
Part of the challenge lies in the vast expansion of the self-employed population. Numbers have surged by 45 per cent, from 3.3m people in 2001 to 4.8m in 2017. But it is a varied bunch; a large number have irregular hours or work on a project-by-project basis, making it difficult for them to set up any regular savings habits.
But despite their diversity, efforts should be made to instil pension savings for this cohort. The good news is, many start off being employed and then move to self-employment, meaning they have already had experience of pension saving. The challenge is trying to continue that good habit.
Nudges could be made through the annual tax self-assessment by including the facility to pay a pension contribution. Or the DWP could work with the new single financial guidance body to encourage pension participation whenever someone registers themselves as self-employed.
The advised private pension sector also has a role here – working with government – to help reverse this trend of falling rates of pension saving. Its experience - borne out by the fact that many self-employed already save with the help of their financial adviser – will be invaluable, and initiatives in this area should try to harness the power that advice can bring to increase pension savings.
Auto-enrolment has been successful in getting people to save. But this is just the beginning. The government and industry now needs to push on with measures to increase scope and, importantly, contributions. Because every month’s delay means a month’s lost saving and lower retirement income for our nation’s people.
Rachel Vahey is product technical manager for Nucleus
