Has auto-enrolment come of age?

Finding concrete ways to extend auto-enrolment to currently ineligible groups will take time, and it is too soon to say whether savers will baulk at the gradual contribution hikes, which start on April 6.

The responsibility for the success of auto-enrolment is shared between the government, industry bodies, financial services providers, employers and employees

Natanje Holt, Bravura Solutions

As the pensions industry waits to see how employees respond to the introduction of phasing, the government works on its proposed changes to auto-enrolment, with the aim of implementing them in the mid-2020s.

AE seen as a success story

More than 9m people have been auto-enrolled into a workplace pension since the initiative was introduced in 2012.

Natanje Holt, retirement specialist at software provider Bravura Solutions, says the introduction of auto-enrolment “so far has arguably been a success and has provided the industry with a great platform to engage consumers with savings and pensions, without having to drastically alter their habits”.

However, she thinks “progress has been slow”, and while millennials and Generation Y will benefit from the policy, Generation X will need to make up the lost years of saving.

But for Andy Tarrant, head of policy at mastertrust The People’s Pension, “progress has been pretty tremendous”.

He points out that auto-enrolment has been supported across different political parties, and is seen as a policy success by most politicians.

The big jump in people saving can be seen among those aged between 22 and 29. Auto-enrolment has almost doubled the participation of people in this age group in pension schemes, according to Pensions Policy Institute research published in February.

The thinktank found that an 18-year-old could have a pension fund 4 per cent higher if they were to begin saving straight away, rather than waiting to be automatically enrolled 4 years later.

The Department for Work and Pensions’ auto-enrolment review, released in December 2017, revealed that the government intends to bring down the lower age limit for enrolment to 18 from currently 22. This will bring around 900,000 young people into pensions saving.

But while the proposal extends the initiative to this group of people, the solution is not as simple for other groups of workers currently left out.

Still some way to go for the self-employed

Figures from the Office for National Statistics show that the number of self-employed increased from 3.3m people in 2001 to 4.8m in 2017.

When the Pensions Advisory Service launched guidance for the self-employed earlier this year, it highlighted that less than a third of them pay into a pension.

The DWP has said that there is no one uniform solution for this diverse group of people.

Its auto-enrolment review set out a series of targeted interventions to establish what works to boost pension saving for the self-employed.

Trials could include working with organisations which act as touch points for the self-employed, such as banks, to find out how technology could assist in facilitating pension saving.

“I think it’s hoping that there’ll be a magical technological solution, and I don’t think that’s the way that they’ll actually achieve it,” Tarrant says.

Hugh Nolan, president of the Society of Pension Professionals and director at consultancy Spence & Partners, says he was disappointed by how the self-employed issue was addressed in the review.

The government’s plans for a series of trials for ideas which “might work in the future”, says Nolan, is simply “kicking the problem into the long grass”.

Have we solved the issue around multiple job holders?

Nolan was surprised by the statistics on multiple job holders in the auto-enrolment review’s accompanying analytical report.

At March 2017, more than 70 per cent of multiple job holders were already eligible for auto-enrolment as they earned £10,000 or more in at least one of their jobs.

“The problem wasn’t as big as I expected it to be,” Nolan says.

However, about 64 per cent of the multiple job holder population is female – more than the gender split of overall jobs, where only about 47 per cent are held by women.

“There is a disproportionate impact on women… so there is a big gap there, in that the jobs that women are doing aren’t always being fully pensioned,” Nolan says.

The government aims to support those with low earnings and multiple jobs by removing the lower earnings limit so that contributions are calculated from the first pound earned, rather than from a lower earnings limit, which stood at £5,876 in 2017-18.

The removal of this limit could bring an extra £2.6bn into pension saving.

Nathan Long, senior pension analyst at Hargreaves Lansdown, said that while this “does a lot to help the people with multiple jobs”, it does not completely solve the problem, because people still need to be earning at least £10,000 in one of their jobs to be auto-enrolled.

The self-employed issue is “easier to tackle”, he says. “I’m not convinced [by] the appetite within government to introduce auto-enrolment through the tax return system, but I do think that that’s the way to solve the issue.”

Not just a phase

The government’s proposed changes set out in the review are not due to kick in until the mid-2020s. Meanwhile, phased increases of minimum auto-enrolment contributions have already begun.

On April 6, minimum contributions for employers rise to 2 per cent from 1 per cent, while staff contributions increase to 3 per cent from 1 per cent.

On the same date next year, contributions will rise again – to 3 per cent for employers and 5 per cent for employees. This will bring total minimum contributions to 8 per cent, but that is widely expected to be too low still.

In 2013, theOECD called for minimum contributions to be raised to 15 per cent to give savers a decent retirement income.

The effect the increases will have is yet to be seen, as many savers are unaware they are due to happen. A recent survey of 3,000 people by consultancy Barnett Waddingham found that 65 per cent of respondents either do not know that minimum contributions are increasing or even what auto-enrolment is.

Long says he does not necessarily think there will be huge opt-out levels as a result of the contribution hike.

However, he says pockets of people within certain employers might realise that more money is disappearing out of their pay, “and if news spreads, there are worries you’d get opt-out rates spiking”.

Engagement versus inertia

Auto-enrolment relies on inertia, but there is a balance to be struck between that and engagement when it comes to contribution increases and potential opt-outs.

With contributions going up, it is important to put out some “really positive messages to enforce the value of saving” to offset any risk of people opting out, says Long.

Natalie Flood, vice president, defined contribution and wellbeing at consultancy Redington, says: “There continues to be low engagement with pensions, so many people aren’t aware of what they’re paying.”

Flood adds that, for the majority of people, the difference in take-home pay will not be sufficient for them to opt out, but adds that more still needs to be done to encourage engagement, “so that individuals value pensions savings for what they are”.

Continued success depends on collaboration

Holt disagrees, arguing that for an eligible worker earning just above the threshold of £10,000, the higher contribution rate might be seen as too much.

"The responsibility for the success of auto-enrolment is shared between the government, industry bodies, financial services providers, employers and employees," she notes.

Holt says: “Effective communication and engagement is going to be key for all parties concerned. We need members to understand and connect with the benefits of long-term savings and short-term savings – it does not have to be one or the other."

She suggests that the government, providers and employers could put in place scenario planning in the event where higher opt-out rates are observed as a result of the minimum contributions rises.  

“One such option could be to default people back to the lower contribution levels, while also putting in place nudges to encourage them to move back to the higher rate later on,” she explains.