Auto-enrolment: the great pension experiment
For employer and adviser use only
We’re fast-approaching the fifth anniversary of auto-enrolment, and on the surface, everything is looking rosy. The great pension experiment seems to be working, with over 8 million more people saving into a pension
Before auto-enrolment kicked off in 2012, the future looked bleak with pension saving in the doldrums in the private sector; between 2006 and 2012 pension saving had declined from 12 million employees to 10.7 million employees. The UK has a long history of workplace saving, but continual pressures on defined benefit (DB) schemes, increased regulation, the removal of pension compulsion in 1986 and the move to defined contribution (DC) schemes led to fewer pension savers, as well as lower savings.
Auto-enrolment is trying to reverse this decline by not only increasing the number of pension savers, but also normalising long-term pension saving so it becomes part of everyday working life. As soon as someone enters the workforce or changes jobs, as long as they meet the eligibility criteria, they are auto-enrolled into a pension scheme and immediately start saving and benefit from an employer contribution. Long waiting periods, high eligibility ages, and pension schemes limited to larger employers are now a thing of the past.
So, is auto-enrolment working?
Well yes, (or at least on the surface), according to the latest Department of Work and Pensions (DWP) statistics. In June, the DWP published its latest ‘Workplace Pension Participation and Savings Trends of Eligible Savers Official Statistics: 2006 to 2016’ and there are some signs that suggest auto-enrolment is making a real difference.
These figures show the effect of the continued roll-out of auto-enrolment to smaller employers. So, all well and good…or is it?
Public vs private sector
Unfortunately, whilst saving signs are generally positive, there are disparities between those saving in the public and private sector.
The private sector is leading the way by driving increases in participation rates at the lower age bands and, in recent years, there has been a massive jump in the under 30s saving increasing from 24% in 2012 to 68% in 2016. I talked about this in last month’s article. It’s beginning to look like pension saving is normalising, and that is great news for us all when it comes to future opportunities and growing our next generation of clients.
While the amount saved per eligible saver has increased in the public sector, it has declined in the private sector. This is due to many auto-enrolees, and their employers, saving at the minimum level, currently 2% of a band of earnings. So, as more employees are auto-enrolled, they’re suppressing average contributions.
As contributions are set to increase to 5% in April 2018, then to 8% in 2019 this will drive up average contributions. Equally, this could lead to a greater opt-out rate, with lower pension participation rates. The path forward is by no means certain and advisers, together with providers, need to constantly bang the drum emphasizing the value of pension saving.
So, what’s the answer?
One way to address an increase in the opt-out rate is to make pension saving more flexible as statutory minimum contributions rise. Currently, if an employee can’t afford to pay the higher rate they’re likely to opt-out or agree with their employer to pay a lower pension contribution. But in either scenario, they will lose the employer contribution. Instead, we believe the review of auto-enrolment should allow greater flexibility so that if an employee is unable to pay the higher minimum contribution of say 5%, but can pay 3%, the employer should be forced to contribute. This is much more likely to drive better employee engagement and ultimately, better retirement income outcomes. Of course, coupled with ‘save more tomorrow’ schemes - in which the employee agrees to pay higher contributions at a future date - potential savings would be even higher.
There’s been a lot of discussion about eligible savers, but there are a lot of people missing out on auto-enrolment and valuable employer contributions, including low earners, some with multiple jobs. Simplifying auto-enrolment and removing the £10,000 earnings trigger would automatically bring more people into pension savings. Paying contributions on all earnings, instead of limiting them to a band of earnings, automatically increases pension contributions, making them more meaningful, helping people to build up savings quicker giving and having larger pension pots means people are more likely to seek financial advice when they come to take a retirement income.
Increasing pension engagement
It's important that employers take a prominent role in increasing awareness of auto-enrolment and the pension saving options available to their employees, encouraging them to make more active decisions, such as increasing their contributions and selecting their investment options. Employers can’t do this alone. Fortunately, advisers are well equipped to help employers to drive up employee engagement in the workplace.
It’s vital that both advisers and scheme providers play their part and support employers with their auto-enrolment duties – making the process as simple as possible. Support can come in the form of face-to-face advice or through online auto-enrolment solutions, such as Aegon’s SmartEnrol, and tailored scheme communications.
The great pensions experiment is beginning to normalise pension saving behaviour. Auto-enrolment has been a success so far because advisers, providers, regulators, and government agencies have all worked together. Inertia seems to be working, but now we need to start moving towards engagement and win that battle. Advisers have the potential to play a pivotal role in moving auto-enrolment to the next stage.