October marks ten years since the advent of automatic enrolment for workplace pensions. What’s been learned in the last decade?
The automatic enrolment (AE) of employees and other workers into workplace pensions faced scepticism when its initial phasing in began in October 2012. Plenty of pension experts had witnessed the failure of earlier initiatives to increase pension take up. In the 2000s, the launch of stakeholder pensions ended with many employers nursing ‘empty shell’ schemes, mandated by law but devoid of members and cash.
Set up to succeed
The outcome for auto-enrolment was dramatically different, as the graph shows. Much of that is due to careful design:
- Inertia plays a major role – membership is automatic, so deliberate personal action is required to opt out.
- Employer and employee contributions were initially pitched at a manageable low level, before two staggered increases.
- The first schemes were set up by the largest employers, who were best equipped to organise the roll out, with the smallest enterprises given the longest lead time to participate.
- The government established an arms-length default provider, the National Employment Savings Trust (NEST). By March 2022, NEST
was managing over £24 billion on behalf of over 11 million members and nearly one million employers.
The membership of workplace pensions as at April 2021 was 79% of those eligible to join, a significant improvement on 47% in 2012. The
chances are that if you are 22 or older, and your employer provides you with a pension, it is a workplace pension operating under auto enrolment.
However, the success of auto-enrolment pensions does not mean that the issue of adequate retirement funding has been solved,
either for you personally, or the workforce in general:
- The minimum level of contributions is still widely considered to be too low. The Association of British Insurers (ABI) recently
suggested that to be adequate, total contributions should rise to 6% each for employer and employee, with an increase phased over the next ten years.
- As the table opposite shows, no contributions are levied on the first £6,240 of earnings, which has a disproportionate impact on low earners. Without that restriction, total contributions for someone earning £10,000 would be £500 more.
- At present each employment is considered separately, meaning many people with more than one job could earn more than £10,000
in total, but receive no employer pension contributions at all. If the £6,240 exclusion were removed, then logically the current earnings trigger of £10,000 would also disappear.
Self-employed losing out
And one major group has been almost completely passed by when it comes to AE workplace pensions: the self-employed, who represent about one in eight of the UK workforce. While some gig workers have become eligible for auto-enrolled pensions following Employment Tribunal decisions, the self-employed generally are left to their own retirement planning devices. As a result, currently only 16% of self-employed workers are now saving in a private pension, down from almost 50% 20 years ago.
In the current economic environment, no government is likely to risk proposing an increase in the mandatory minimum contributions, however sensible that may be. You don’t need to wait for the government to act to take action yourself. To find out if your current level of pension contributions, whether automatic or otherwise, are sufficient to meet your retirement goals please get in touch.
The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.
The value of your investment and the income from it can fall as well as rise. You may get back less than you invested.
Past performance is not a reliable indicator of future performance.