Yet predictions that many would exercise their right to opt out fell short. According to government trend figures, the UK private sector workplace pension participation rate in 2021 stood at 86 per cent of eligible employees, nearly double the rate of 2012.
So, as we approach the 10-year anniversary of auto-enrolment being rolled out, the evidence suggests its impact on the long-term savings landscape has been nothing short of transformative.
The end of this year will also mark the 10th anniversary of another radical overhaul: the retail distribution review. If the RDR has not proved transformational, it still had the effect of reshaping the advice sector.
While fears of a sharp decline in adviser numbers were not realised – in 2020 the Financial Conduct Authority said they had in fact edged up – the cost of delivering advice has increased and the ‘advice gap’ remains too wide.
AE and the RDR have been among the biggest developments in financial services this century, with the pension freedoms not too far behind.
But while the industry has come a long way in many respects, there is clearly still work to do, particularly when it comes to meeting the needs of consumers.
Now the industry is gearing itself up for another set of wide-ranging reforms, under the consumer duty that takes effect next year.
Filling the gaps
As we mark the 10th anniversary of AE, household finances are under a severity of pressure that is unprecedented in modern times. UK inflation is at a record high and expected to continue rising as energy prices climb.
Real wages fell at the fastest rate in at least 20 years during the second quarter of this year, while the cost of living crisis has contributed to UK consumer confidence plummeting.
The financial pressures on households have direct implications for pensions. There is an ongoing debate over the extent to which default AE contribution rates should be increased over the next couple of years, reflecting long-held concerns that the current minimum levels are not sufficient for an adequate pension pot.
Calls also continue to grow for greater pensions support for the self-employed, who are currently excluded from AE.
But in the shorter term, the more pressing worries surround the risk of people opting to reduce or stop their pension contributions as a way of cutting costs.
The industry has a responsibility – and an opportunity – to support consumers through such tumultuous times. Although the rapid and significant rise in the number of people saving for retirement is clearly good news, it also poses a challenge for the industry, as well as advisers, employers and other stakeholders.
This is a challenge of engagement.
At one end of the pensions journey there is a growing population of savers enrolled into schemes but engaged only on a very passive level, with few decisions to make, if any. At the other end is a population of savers reaching retirement in a post-freedoms era in which the added flexibility they enjoy comes with responsibility and complexity.
The industry should seek to support as many people as possible at all stages of the journey, not least in these turbulent times. This means the advice community working together to close the advice gap by making good quality advice much more accessible to the wider population.
In other words, reaching those that could benefit most from advice but are currently unable and/or unwilling to engage.
The barriers to achieving this are lowering all the time, due to the ongoing development of digital services, from hybrid advice models and guided journeys to the front- and back-office technology that can drive costs down and enable the industry to offer affordable advice at scale.
As the FCA has said, there is “significant scope” for technology to help companies reduce costs and make advice more affordable. It referred to one company’s estimate that “used properly”, technology could reduce the time taken to prepare an ongoing review from six hours to just 45 minutes.
A duty to step up
It is worth thinking about the new consumer duty in this context. For instance, the ‘consumer understanding’ outcome emphasises the ability of companies’ communications “to support and enable consumers to make informed decisions about financial products and services”, as well as providing them with the information they need “at the right time, and presented in a way they can understand”.
The ‘consumer support’ outcome has a particularly direct relevance to long-term savings, with the focus on enabling consumers to realise the benefits of the products and services they buy, pursue their financial objectives and ensure they can act in their own interests.
While providers have made big strides in the quality of communications and support, further progress is required if the industry is to reach the millions that are auto-enrolled but disengaged, bridge the advice gap and support consumers through difficult times.
Scale will become increasingly important in enabling companies to make greater investment in technology and create more opportunities for consumers around price, product and services.
A decade after AE revolutionised the workplace savings market and the RDR reshaped the advice sector, the industry still has to raise its game when it comes to meeting the needs of its customers. The consumer duty might just be the timely nudge that is required.
Alex Kovach is chief commercial officer at Nucleus
