2022 marks the 10th anniversary of the government’s flagship auto-enrolment (or AE) policy. But how successful has it really been and what does the future have in store?
Reasons to celebrate
More than 10 million people have been auto-enrolled into a workplace scheme since the programme began in October 2012 and 88% of eligible employees (19.4 million people) were participating in a workplace pension in 2020. The government’s coronavirus job retention scheme supported both the payment of the bulk of employee wages and for a short time, employer’s pension contributions. This support along with natural inertia kept employees saving in workplace schemes even during these challenging times.
Challenges to overcome
Eligibility criteria for AE mean that in reality around 5 million people don’t qualify to be auto-enrolled. This could be because they earn less than £10,00 a year in a single job, are under age 22 or over State Pension Age. This disproportionately affects women who are more likely to occupy part-time and lower-earning roles. And while non-eligible workers can opt in, and more of them are now doing so, there remains a considerable gap.
Complacency is another major concern. AE contributions are now at a minimum level of 8%, but few individuals are choosing to pay more than this amount. This could be due to the pressures of repaying debt or getting on the property ladder but it could more worryingly point to the assumption that saving 8% of salary will provide an adequate level of retirement income. And understanding what an adequate level of income will be is difficult in itself. We discussed this topic in our blog earlier this year: How Much Do Your Employees Need To Live On In Retirement?
A review of AE in 2017 made a number of recommendations which it was hoped would begin to be incorporated in the mid-2020s:
• Lowering the age threshold for eligibility from 22 to 18.
• Removing the lower earnings limit so that pension contributions are calculated from the first pound earned, enabling individuals to save more and benefit from a higher employer pension contribution.
• Increase pension participation among the self-employed by testing a number of approaches.
Brexit and the Coronavirus pandemic may have delayed this timeline as the work required to implement these recommendations has yet to be started.
The importance of saving
Most qualifying workplace pension schemes in use for AE are defined contribution schemes, where pension savings are built up based on contributions from the employee and employer (if you’re in a workplace scheme) and returns on your investments.
The best time to start a pension is as young as possible and to contribute as much as you can afford. Making an early start lets employees take full advantage of compound interest. This means small savings early can be more important than larger savings later.
Since the introduction of auto-enrolment, a workplace pension is taken for granted as being available. So how can you make your offer stand out? As workplace pension saving becomes the norm, the need for access to quality financial advice has grown. Please click here to see how it can add real value to your business and its employees. If you wish to discuss further, please complete the form on the page linked to above or discuss with your regular LEBC Consultant.
Source: Thinking ahead: The future of auto-enrolment and saving, Kate Smith, Head of Public Affairs - Aegon UK, 29 November 2021.
A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The information contained in this article is based on the opinion of LEBC and does not constitute financial advice or a recommendation to any investment strategy, you should seek professional financial advice before embarking on any course of action