PensionsFeb 20 2020

Will auto-enrolment deliver?

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Will auto-enrolment deliver?

Pensions have changed considerably over the last decade or so.

Auto-enrolment, launched in 2012, has been one of the biggest shake-ups, changing the concept of workplace pensions.

Some workers will now never have known anything different, but previously people could decide whether they wanted to join a workplace pension scheme or not, and not all employers offered the option.

This was contributing to a serious lack of pensions savings activity, which the government of the day wished to address.

The result was auto-enrolment – a ‘win-win’ solution, aimed at making workplace pensions affordable for employers and an attractive proposition for workers.

There are too many people missing out on auto-enrolment Kate Smith, Aegon

As the name implies, this meant automatically enrolling employees in a workplace-pension scheme, where unless they actively opted out, they were ‘in’.

Workplace pensions - a work in progress

So, what is the verdict on auto-enrolment, nearly eight years and more than 10m scheme members later?  

“Automatic-enrolment has changed the workplace-pensions landscape completely,” says Maike Currie, director for workplace investing at Fidelity International:

“Many more workers now find themselves with retirement savings plans that their employer will be contributing to as well.”

She adds: “Automatic-enrolment has created millions of ‘investors’ in the UK, whether they realise it or not.”

But it has not been an unqualified success.

Kate Smith, head of pensions at Aegon points to some flaws in the scheme, with regard to qualifying criteria.

She says: “There are too many people missing out on auto-enrolment.

“This includes the under 22s and those earning less than £10,000 in a single job, the majority of whom are women

"In addition, the growing army of self-employed are excluded from auto-enrolment. These gaps need to be urgently addressed as these workers risk being left behind.”

Storing up problems in the long run

It does not mean that those who are in the scheme can sit back and relax, though.

While the amount of minimum contribution required has increased over the years (current figures are 5 per cent of salary from employees and 3 per cent from employers), there is no guarantee that people will be able to live comfortably on their auto-enrolled retirement savings.

Some may therefore be suffering from a false sense of security: “The reality is that, for most people, an 8 per cent contribution isn’t going to be enough to retire on, Ms. Smith warns.

“But, unfortunately many people may believe that it’s an adequate contribution as that’s the rate set by the government.”

This could lead to serious difficulties later on – not just for retirees, but for the credibility of the scheme itself, as Helen Morrissey, pensions specialist at Royal London points out: “The success of auto-enrolment will be undermined if people spend their entire working life contributing to a pension and then don’t get a decent income from it.

“The next challenge is to get them to increase their pensions.”

This is easier said than done, however, as Ms. Morrissey adds: “The success of auto-enrolment has been largely because it harnesses people’s inertia.

"Increasing contributions, however, requires a conscious decision to do so.” 

There are currently no government plans to increase minimum contributions, but some believe change is needed here too, as Laura Stewart-Smith, workplace savings manager at Aviva says: “We believe that further attention needs to be given to the level of minimum contributions – they should ideally rise to a 12.5 per cent split between employers and employees.”

Wealth adviser, Anna Sofat, associate director at Progeny Wealth suggests a stepped approach could also be helpful: “Over time, the contributions should be increased, for instance with age – starting low when young and increasing each year.” 

Lack of engagement

In the meantime, the lack of engagement remains an issue, as Ms Stewart-Smith says: “The main challenge with auto-enrolment is that it does encourage a degree of complacency and lacks the need for individuals to engage.

“With workplace pensions now, you can be auto-enrolled into a pension, at a default contribution rate, with a default retirement age and a default investment choice.

"Whilst admittedly this makes for a hassle-free journey, it can also lead to the assumption that all those ‘decisions’ are correct, which isn’t always the case.

"Employees should always be encouraged to take time to understand and consider the decisions that have been made.”

And there is very little evidence of engagement at the moment, as she observes: “The levels around pension engagement generally need improvement.

"For example, we know that over 48 per cent of savers over the age of 55 don’t know how much is in their pension pot.”

But there are promising signs at the other end of the age spectrum: “Since the introduction of auto-enrolment we’ve seen an increased engagement with pensions from our younger clients,” says Catriona McCarron, wealth manager at Ascot Wealth management.

And there could be ways of further engaging the young, as Jeannie Boyle, executive director and financial planner at EQ Investors says: “I'd like to see more impact investment options available in pensions.

"There are some ethical funds, but they're more about excluding arms and tobacco, rather than giving young people the opportunity to invest in assets that help create a sustainable future.” 

Regardless of age, re-thinking communication of auto-enrolment information could be key to improving engagement.

Ms McCarron observes: “In many cases auto-enrolment providers give a brief to companies for them to present to or pass on to employees, educating them on the savings input, fund options and charges. This isn’t always easily digestible.”