Government delivers lukewarm response on hiking auto-enrolment pension contributions

The world was very different six years ago when the 2017 review recommended expanding the automatic enrolment reforms.

While the Government says it remains committed to reducing the age at which employees qualify for auto-enrolment from 22 to 18 and ditching the lower earnings figure against which minimum contributions are measured, an implementation timetable of the ‘mid-2020s’ is purposefully woolly.

The reality is that millions of households are struggling to meet day-to-day living costs. There are signs that inflation will come down in the coming months, but the latest CPI figure remains in the double-digits and the Bank of England’s target of 2% still feels a long way away.

Auto-enrolment opt-outs haven’t spiked dramatically as a result of this yet, but AJ Bell research carried out towards the end of last year showed a third of workers could quit their workplace pension in response to rising living costs. This is the sort of scenario ministers will be desperate to avoid.

Over the medium-term, boosting pension contributions will need to become a priority for either this Government or its successor. But given the pressure facing individuals and businesses, it is understandable the Government is equivocating over expanding auto-enrolment at this point in time.

Tackling the pension saving gaps

Auto-enrolment has been successful in boosting the number of people saving something for retirement, but both adequacy and coverage remain significant issues that need to be addressed.

Millions of self-employed workers are not covered by the reforms, and many are saving little or nothing for retirement as a result. An Office for National Statistics (ONS) study published in 2018 found that almost half (45%) of self-employed workers aged 35-54 reported having no pension wealth whatsoever, compared to just 16% of employees.

Among those aged 55 and over, the proportion of self-employed workers with no pension wealth improves a little to 30% – but remains well below employed workers (14%).

Although the challenge here is clear, the solutions are less obvious. Trials exploring using nudge techniques to encourage people to save more for retirement have shown some promise but are unlikely to come anywhere near the step change in pension saving behaviour we saw as a result of auto-enrolment.

The Work & Pensions Committee’s suggestion that Government consult on using the National Insurance system to effectively replicate matched auto-enrolment contributions for self-employed workers received a lukewarm response, with the Treasury warning introducing this would ‘present a significant challenge’ as new systems would need to be built to administer it.

Aside from this practical challenge, hiking NI for the self-employed – with the option of diverting this increased tax into a pension – would also come with significant political risks.

Tackling the gender pensions divide

The Government has committed to coming up with an agreed definition of the gender pension gap, a small but necessary step in reducing the divide in retirement provision between men and women.

The most effective solutions to the gender pension gap are likely to be found in the labour market.

If as a society we are able to equalise salaries, career progression and caring responsibilities, we should naturally see the gap between the value of men’s and women’s pensions reduce.