More to be done

Yes, automatic enrolment has been successful, but adequacy of contributions and increased coverage across women and ethnic minorities are needed if it is to remain a success

Chris Curry, director, Pensions Policy Institute

Automatic enrolment into workplace pension schemes is one of many private pension policies introduced in recent years, but how well is the policy doing? And is it time for an overhaul?

To answer that question, we need to consider what its objectives are. It was recommended by the Pensions Commission as a way of addressing the failures of the system of voluntary pension saving, which had patchy coverage, meaning many individuals had no pension saving outside of the state system.

Well, it is safe to say that coverage of workplace pension schemes has increased. In April 2020 nearly eight out of ten UK employees (78 per cent per cent) had a workplace pension compared with less than five out of ten in 2012.

But coverage is not the only measure of interest. There were concerns raised that even if automatic enrolment increased coverage of workplace pensions, it would simply lead to the same amount of pension contributions being made, but spread over a greater number of people. So have contributions to workplace pensions also increased?

It turns out that they have, though the growth is not as great as in coverage – combined employer and employer contributions reached over £60bn in 2019, compared to £50bn in 2012.

So by these measures, automatic enrolment has been a big success. But it hasn’t all been positive. System design has led to some problems in other areas. For example, the number of deferred pension pots in the UK DC master trust market is likely to rise from 8m in 2020 to around 27m in 2035.

And it is also true that automatic enrolment can still do more, in terms of both coverage and contribution level. There are still parts of the population – in particular women, those from some minority ethnic groups, people with disabilities and the self-employed – where both coverage of workplace pensions and subsequently contribution levels and income in retirement are lower.

While some of this is due to structural inequalities in other areas, such as lower earnings, less labour market participation, more part-time working, the system of automatic enrolment could be changed to reduce some of the gaps we currently see.

And even the new normal will not, in itself, provide many people with an adequate income in retirement alongside the new state pension. The minimum contribution rate, at 8 per cent of earnings between £6,240 and £50,270 is too low for that. That doesn’t necessarily mean that the minimum itself needs to be higher, but if not it means more needs to be contributed voluntarily, income found from other sources, pension income taken later, or a lower income in retirement accepted.

Luckily, there are already some proposals, accepted by the Government, that would help move things in the right direction. It is now almost 5 years since the 2017 Automatic Enrolment Review made a series of recommendations that would increase coverage and increase the minimum contribution amount, as well as looking to increase engagement with workplace pension saving. While the Government remains committed to these, no time has been set for the necessary legislation, let alone implementation. Arguably, it is time for another review of the system, although that may prove difficult until the previous proposals have been implemented and can be evaluated.

One reason currently being given for not implementing further changes to automatic enrolment is the current income squeeze that many individuals are currently facing. It is true that when people are struggling to make ends meet, there is increased pressure on the amount that they can put aside for the future. And also a need for financial resilience, and potentially flexibility.

But that does not mean that we shouldn’t think about what happens when wages and prices return to a more comfortable balance. Individuals are always going to need to be able to live once they have stopped work. And as we have seen from the 2017 review, a long time can pass between having the plan and that plan actually being in place. One of the initial reasons for success was the way changes were gradually phased in over time, which could be repeated. We should be basing policy decisions on future needs, rather than just looking at the situation today.

Overall, it is fair to say that automatic enrolment has been pretty successful, perhaps the most successful pensions policy of recent times. But the hard work is only just beginning. Automatic enrolment is providing a pretty firm base for pension saving, but it must evolve as the world changes to ensure it remains effective.