REBA Inside Track: Why it’s time to reinvigorate auto-enrolment
What were you doing in 2012? Enjoying the London Olympics? Dancing Gangnam style? Implementing a new pension scheme?
As children and their embarrassing parents attempted to copy Korean artist PSY’s dance moves, the very largest companies were busy with the more serious business of complying with the new auto-enrolment legislation.
By 2017 every business, including the smallest startups, were included in auto-enrolment (current dance craze: flossing). Then, minimum contributions gradually increased from 2% of eligible earnings to the current 8%.
Tranquil to stagnant
Perhaps after such an intense period of change, it was inevitable that there would need to be some tranquillity, not least to give employers time to get used to the process and cost of offering pensions to everyone.
It is easy to forget that before auto-enrolment, businesses didn’t have to provide a pension scheme at all.
The sheer scale and implementation effort required by employers, the pensions industry and politicians to make auto-enrolment happen still feels mind-blowing.
But it’s now 12 years since auto-enrolment started – and 16 years since the Pensions Act 2008 that made auto-enrolment law. There is a point where tranquil risks turning to stagnant.
Despite a review in 2017, which recommended increasing minimum contributions, and the 2023 Pension Schemes Act that would have extended the scope of auto-enrolment, neither made the leap from proposal into practice.
There is still a lot to do. Research from the Pensions and Lifetime Savings Association (PLSA) and others shows that auto-enrolment minimum contributions aren’t sufficient to achieve a moderate standard of living in retirement.
And most schemes and employers don’t know what outcomes members can expect from the money they pay in, meaning that there’s little or no link between pension contributions and adequacy.
Low-paid workers (typically part-time) are excluded from pension saving, often across multiple jobs, because they don’t meet the earnings trigger of £10,000.
And with increased interest in degree apprenticeships, the age restriction that excludes anyone under the age of 22 from auto-enrolment is increasingly difficult to justify.
Legislation vs inclination
Soaring inflation, recovery from Covid-19 and political instability aren’t the ideal backdrop for potentially more costly auto-enrolment rules.
But there will never be a perfect time to make changes – and knowing that change is coming is the best way of preparing for it.
Of course, many employers already offer contributions above auto-enrolment minimums. A sizeable proportion of businesses also offer contribution matching: if an employee pays more into their pension, so does the employer.
There is onus on the employee too – it is their retirement, and employers can only afford to put so much into pensions. Visibility of savings across multiple jobs (step forward, pensions dashboards) will help.
Better understanding of retirement saving could boost employees’ confidence about retirement planning, including increasing contributions when circumstances allow.
Review must lead to action
The acid test of auto-enrolment success is whether employees can afford to retire at a credible age, and with an adequate standard of living in the future. Given the long timescales involved in pensions, we have yet to see if it will achieve that.
The government’s review of pensions has promised to look at adequacy later in 2024.
This needs to include a proper assessment of the scope, contribution rates and processes involved in auto-enrolment – including how to link the saving (contribution) and spending (adequacy) aspects of retirement saving.
Crucially, a review needs to lead to realistic, time-specific recommendations that actually happen. Without that, despite all its early plaudits and promise, auto-enrolment risks getting stuck in 2012, along with dancing Gangnam style.
