Automatic enrolment (AE) has undoubtedly been one of the most successful policy interventions ever implemented to help improve long term financial resilience. After the stakeholder pensions ‘experiment’ in the early 2000s – deploying an ‘opt in’ approach – the ‘opt out’ version launched in the 2010s proved markedly more effective in getting people saving.

This new approach defied the critics in nudging people into workplace pensions and proved to be enduring as people moved from job to job. It largely survived the pandemic, partly of course due to pension contributions being included in the furlough scheme. The policy now faces perhaps an even bigger challenge as the cost-of-living soars due to energy, fuel and food prices alongside increasing mortgage interest rates.

In this context, it may seem odd to be discussing retirement saving when there are so many more immediate challenges facing households and businesses. And it’s right that we need to prioritise what’s happening today over preparing for the future. But today’s crisis is instructive, and we must continue to plan for an increasingly aged population, whose cost-of-living challenge could prove much more profound and far more difficult to resolve than the problems we have just now.

We should, at the very least, have a plan for how we improve people’s retirement prospects further to avoid a bigger crisis in the decades ahead.

We already have a starting point for this plan. The comprehensive review of automatic enrolment in 2017 proposed that we lower the minimum age from 22 to 18 and remove the lower earnings limit from the calculation of contributions. This would bring more people in to saving earlier, and significantly increase the amounts being saved by those on the lowest earnings. The plan was to implement these changes in the ‘mid-2020s’ and we should set out a plan to do so, subject to resolution of the current inflationary challenges.

Beyond that, there is widespread consensus that we should increase contribution rates from current levels. Suggestions range from around 12-15%, but it is perhaps a little crude to look at a blanket solution to what will become a more individualised problem. The current rate of 8% of band earnings was seen to be universally appropriate as a baseline rate of saving. In practice, it may well remain appropriate for those on lower earnings, and for whom the State Pension will form a significant replacement of their final earnings at retirement. There is a reasonable argument that for people in this position, saving more into pensions is secondary to using what they earn to get by today, even outside of the current cost-of-living challenge.

The position is different for people on say, £30,000 pa, for whom the State Pension alone may only replace one third of their income, a long way off the two thirds of income targeted by many Defined Benefit schemes of the past. For someone earning £50,000 pa as they approach retirement, they will need significant savings beyond the State Pension to get anything like two thirds of their final income. This will require more than the current savings rates under AE and will of course be affected by the time these people have between now and retirement.

The next phase of AE will be more nuanced, perhaps more individualised, and will require careful planning to ensure it is more targeted in its approach. This requires a discussion about the rates, about the composition of those rates between employers and employees, the way they are deployed (e.g. opt-out or opt-in), and how and when they will be implemented. This consultation will take time, and it will take more time to make the changes once agreed, perhaps a decade in total. That would be 20 years on from introduction of AE, forming half the working lives of many people.

Planning over this sort of timescale requires cross-party consensus, as the policy will likely span successive governments. This was true for the introduction of the original policy in 2012 and has been key to its success so far. As we face up to the long-term cost-of-living crisis of an under-saved ageing population in the future, a similar consensus may be needed again. 

Consensus, and a plan.