Government needs to steam ahead with automatic enrolment changes

It’s now over ten years since pensions automatic enrolment started, so it feels like a good time to stop, take stock and assess whether the policy is working as intended. And if not, to put it right.

Automatic enrolment was launched in a blaze of glory in October 2012. It started with the biggest employers enrolling new staff into pension schemes. But quickly smaller employers came on board, and now even the ‘one-person’ employer – for example the parent employing a nanny – has to offer pension provision.

On first glance, it has been a rip-roaring success. The DWP’s recent report ‘Analysis of future pension income’ showed 10.8 million people have been automatically enrolled, and private pension participation has more than doubled from 42% in 2012 to 86% in 2021. That is a tremendous statistic.

However, that does not mean all pension saving problems have been solved. Worryingly, the DWP also highlighted that a large proportion of people are still not saving enough for their retirement – over two in five (43%) people’s pension saving couldn’t buy an annuity which would meet a target replacement rate for an adequate income in retirement – which is 67% of pre-retirement earnings for a median earner (assuming they took a 25% tax-free lump sum as well).

These figures clearly show that although many more people are saving through automatic enrolment, crucially they are just not saving enough. The UK’s pension saving troubles aren’t over.

The DWP is acutely aware of these issues, and as long ago as 2017 it pledged to change the automatic enrolment terms. It promised to make two key changes – to lower the age of automatic enrolment from 22 to 18, and to ditch the lower band of qualifying earnings, and instead calculate contributions from the first pound of salary.

Despite having made such an important decision, the DWP has sat on its hands for the last six years and not made these changes. Maybe because it wanted the right economic environment for employers and workers to increase contributions; maybe because it couldn’t get the opportunity to draft the legislation.

Whatever the reason, the DWP is now pushing forward. But instead of a DWP-sponsored pensions bill, it is backing a private member’s bill brought forward by a Conservative backbench MP solely to make these two changes. This offers a different way of getting legislation done, but it does look likely, with the government’s backing, that the bill will pass.

If the bill does come unstuck and is attacked – which is not impossible given it aims to increase pension costs for people at a time when many are struggling to heat and eat – the DWP can always subtly distance itself from the private member’s bill. The political risk is much smaller; no screaming headlines of government U-turns.

Although this development sounds positive, there is a nasty sting in the tail. If the bill is successful, the changes become law, but the start date is not immediate and will only be set by the government when it deems the time is right. And before that happens, it has to report on the current workplace provision and model the effect of the changes – for members, employers, and itself in terms of additional tax relief. Lower earners could face a big increase in their pension costs.

Credit should be given to Laura Trott, the Pensions Minister, for getting to within a sniff of the statute book. But these changes to automatic enrolment are not home and dry. Even when the bill is passed, there is still the future piece of work leading to another consultation with the industry. There is no deadline – it could be put on the ‘to do’ pile for some time yet.

The changes, when they eventually happen, should help some people. Lowering the minimum age for automatic enrolment from 22 to 18 will give some people a valuable extra four years of saving, and we all know that the earlier you start, the bigger the fund you can build up. An 18-year-old starting to save 8% of their £20,000 salary will, by age 68, have saved a fund 13.5% bigger than someone who started four years later when their salary was £21,650.

Removing the lower earnings limit has the bigger effect. For the same 18-year-old as above, this would supercharge their final pension fund by a staggering 45%, compared to if a qualifying lower earnings band applied. However, plenty of schemes already calculate contributions on this basis – operating a qualifying earnings basis is difficult in practice – so how many people will the new rule actually help in practice?

I believe there is still more the UK could do to improve pension saving. We should not rest on our laurels. The truth is the more money people pay into their pension, the better their pension income will be, with many urging the UK to aim for a 12% contribution rate.

There are other initiatives to consider. One is bringing in a ‘save more tomorrow’ programme, where people can pledge on their next pay rise to also increase their pension contribution rate. This forward-looking commitment minimises loss aversion as take-home pay shouldn’t, in theory, decrease. This has been discussed for at least the last 15 years, but never initiated on a government level.

Introducing a new personalised guidance regime could make it easier to steer automatic enrolment workers into increasing contributions, changing investment strategy or making better retirement decisions.

Better pensions engagement will help as well. Pensions dashboards were in pole position to make that seismic change in the UK, until the brakes were applied earlier this month. But, when back up and running, they should help people take ownership of their pension savings.

Automatic enrolment, this massive social experiment, has been a success in getting most workers saving. But they are not saving enough. Now the DWP needs to not only steam ahead with the expansion to automatic enrolment but look more widely at the other elements that need to change, especially for guidance and increasing engagement.

We shouldn’t waste any more time.

* Calculations assume earnings and lower qualifying earnings band increase by 2% each year, and that investments increase by 4%, net of charges.