Auto-enrolment has been a success since it was introduced 10 years ago. But more must be done to help people save for a financially secure and fulfilling retirement. Inequalities and challenges persist that need to be addressed in the next 10 years.
Auto-enrolment (AE) has revolutionised pension saving for millions of people in the UK.
In April 2021, the UK workplace pension participation rate was 79% (22.6 million employees) – compared to 47% in 2012, when AE was introduced.
Meanwhile, private sector pension participation among people aged 22–29 was 84% in 2020 – up from 24% in 2012.
Gaps in coverage
Gaps remain in today’s AE system, however. And many people still face the prospect of a substantial drop in their standard of living when they reach retirement.
In April 2021, only one-in-five employees aged 16–21 years had a pension. And far fewer low-paid private sector full-time employees participate in a workplace pension.
Meanwhile, in 2018 only a third as many self-employed people contributed to a private pension as did so in 1998.
There is also relatively low participation among certain ethnic minority groups, such as Pakistani and Bangladeshi employees .
Evidence also indicates the gender pension gap may have increased during the pandemic . And there is a risk of this gap increasing further due to the cost-of- living crisis, as people sacrifice long-term savings to fund everyday expenses.
Standard Life’s second-quarter customer survey, for example, found that 52% of women expect to save less over the next few months – compared to 43% of men.
The PLSA Retirement Living Standards estimate that an individual will need a pot of £270,000 to live a “moderate” income in retirement (£20,800 net per year, not including housing costs). The current structure of AE means that a significant portion of the population will have little hope of attaining this.
Inertia vs. engagement
AE has normalised regular pension saving largely through inertia. Thankfully, opt-out rates have been lower than some expected , with various estimates showing they have been between 8% and 14%.
Inertia has its downsides, though, with many people insufficiently engaged with their long-term savings. For instance, more than two-thirds of UK 50–64-year-olds don’t know how much they’ll need for retirement , according to the report A Guiding Hand: Improving access to pensions advice and guidance, produced by the Social Market Foundation and sponsored by Phoenix Group, Standard Life’s parent company.
This analysis also suggests that what many people think they need in terms of size of pension pot upon retirement, is significantly less with what they will actually need to reach their desired retirement income. We estimate the average pension pot under-provision stands at £240,000 .
These challenges are compounded by the nature of the support on offer. Just a fifth of 50–64 year olds have spoken to a financial adviser about their pension, found the aforementioned report, A Guiding Hand: Improving access to pensions advice and guidance. And just 14% of these people used the government’s Pension Wise service when accessing their pension for the first time.
We therefore need to find ways to harness inertia, such as through auto-escalation of contributions; while also finding new ways to encourage people to think more about their long-term savings.
Time for reform
At Standard Life, we’d like to see the government make the following three changes to the AE scheme:
- Reduce the eligibility age from 22 to 18. The age threshold discriminates against those who join the job market at the age of 18. It also ignores an opportunity to embed a savings habit early and generally raise awareness of long-term financial planning among younger people.
- Remove the lower earnings limit – currently £6,240. This would lead to even higher levels of participation, boost retirement funds, and greatly increase savings levels over a generation.
- Abolish the earnings trigger of £10,000. This trigger penalises multiple job holders and the low paid by removing them from pensions saving. These potential savers are disproportionately female and live in historically disadvantaged regions of the UK. Far more women are in part-time work than men , shows data from 2022. This means women are far more likely to fall under the £10,000 minimum and not be auto-enrolled. In addition, non-standard forms of work – ie, part-time, temporary work and self-employment – could increase as employment and work arrangements further diversify due to globalisation, technological developments, ageing and regulation. It is therefore vital for AE to evolve to reflect these changing work practices.
The government is committed to implementing these measures by the mid-2020s, so the policy-making process needs to begin now to ensure this is achieved.
A side-effect of AE has been the proliferation of abandoned small pots, which increases the risk of lost pots and amplifies issues with engagement. In some cases, there is also the risk of fund erosion.
On balance, our preference at Standard Life is the introduction of a ‘pot-follows-member’ approach. This means pensions of a certain size automatically transfer when people change jobs.
If implemented efficiently, this will have the advantage of not requiring any action from the member. It is also an easy concept for consumers to understand, compared to more complex approaches. In a charge-cap environment, concerns about the value for money offered by receiving schemes are greatly lessened.
Of course, AE doesn’t stand in isolation from broader pension policy or societal issues. One of the keys to success over the next 10 years will be acknowledging some of the broader challenges savers face.
Phoenix Insights – a think tank within Phoenix Group – has researched the challenges and opportunities created by longer lives.
Traditionally most people work to around State Pension age. But one-in-four people are not confident in their ability to secure work in later life and are worried that ill health, discrimination or the wrong skills will stop them from earning and saving, found Phoenix Insights research.
Similarly, almost three-in-ten people who currently live in rented property who expect to buy, are not confident about being able to get a mortgage at all or paying it off before they retire.
The idea that people will have an uninterrupted savings journey without other financial pressures isn’t realistic. Pension policy therefore needs to acknowledge and cater for broader socioeconomic challenges many people may face.
Role of dashboards
We expect dashboards will play a significant role in encouraging engagement in the long term, as people see all their pensions in one place.
However, we’d caution against seeing this as a quick fix. We recently spoke to Anders Lundstrom, who runs the Swedish dashboard, and he made clear that dashboards should be viewed as an iterative process.
The launch of Pensions Engagement Season later this year represents a great opportunity to get people thinking about their savings, and we’re excited to be supporting the initiative.
One of our main focuses is to ensure the campaign does not take a one-size-fits-all approach to engagement, but instead recognises the increasingly diverse nature of the UK workforce.
AE has made a hugely positive impact in the last 10 years. With the right reforms in the years to come, we are hopeful it can help even more people to achieve financially secure and fulfilling lives in retirement.