Making pensions
fit for automatic enrolment

Making progress on a long-term issue such as pensions policy sometimes does not sit well with a five-year political cycle. Happily, the introduction of automatic enrolment into workplace pensions has been an exception to that rule. The policy was formed under a Labour government in the early 2000s, went live during a Conservative / Lib Dem Coalition in 2012, and completed its first phase in a Conservative administration in 2019.

Although implementation was led by the DWP, no policy can survive without the buy-in of the Treasury. Getting AE up and running passed this test because the Treasury could see that without action it could face large bills for means-tested support for people in retirement. A steady decline in pension coverage in the private sector provided the ‘burning platform’ which helped AE to answer the two questions necessary for any policy to be adopted – ‘why this?’ and ‘why now?’.

Whilst the primary legislation for AE was already in place in 2010, it was far from a finished product. One of my first actions as minister for pensions was to establish an independent ‘making automatic enrolment work’ review, chaired by Paul Johnson of the Institute for Fiscal Studies. The review reported the same year and almost all of its recommendations were implemented.

One flaw with the design of AE was that workers had to be enrolled as soon as they earned above the lower earnings limit for National Insurance, with mandatory contributions applying from that level. Where someone happened to earn just one pound a year above the threshold, their employer would have to set up a pension for them and pay in one penny a year (based on the initial employer contribution of 1 per cent). There would have been a huge outcry from employers and the media the first time this happened, and the whole policy could have fallen into disrepute.

Partly for this reason, the review recommended having a separate ‘earnings trigger’ – now set at £10,000 – below which workers would not have to be enrolled. But the band of qualifying earnings (to which the mandatory 8 per cent rate applies) would remain the same, starting at the lower earnings limit. This removed the risk of employers having to set up a pension only for a derisory amount to be paid in. It also meant that people who didn’t earn much more than the state pension would not face deductions from their wages in order to top up an income in retirement of a broadly similar level.

An equally important outcome of the review was that it rejected calls to exclude the smallest employers altogether. Parts of the Conservative Party were never comfortable with AE, and those responsible for deregulation often had AE in their sights. For this same reason, the rollout of AE to firms employing less than 50 people was nudged back post the 2015 General Election. Fortunately, as I had hoped, the momentum behind AE was by this point unstoppable and the rollout was completed.

Something which shocked me about the design of AE that I inherited was the almost complete lack of quality standards on AE schemes. While large firms could probably be trusted to ‘choose well’ on behalf of their workers, not every employer would necessarily have the time or inclination to shop around. For this reason, the charge cap of 0.75 per cent was developed, a measure which was controversial at the time but is now generally accepted.

Given that AE was a relatively novel concept in the UK, it was necessary to increase awareness of the policy, especially among the employers who would have to implement it. The main publicity was the highly successful ‘we’re all in’ media campaign which featured household name employers in TV adverts endorsing the policy and reinforcing the ‘behavioural norm’ that when you employ someone you also put them in a pension.

I remain proud to have played a part in what is widely seen as one of the most successful public policy interventions of recent years. But I also feel a tinge of sadness that the successful first phase has been followed by nearly five years of limbo. The ‘burning platform’ of declining levels of workplace pension saving has been ameliorated but not solved, and we now need a renewed sense of urgency to make sure that AE does not become a job ‘half done’.