10 million people saving for retirement, thanks to auto-enrolment

10 million people saving for retirement, thanks to auto-enrolment

The Pensions Regulator will publish its monthly auto-enrolment compliance report this week.
It should confirm the UK’s workplace pensions have now passed the milestone
of 10 million new pension savers since auto-enrolment was started.

Tom McPhail, Head of policy at Hargreaves Lansdown, comments: “Getting 10 million more people to save for their retirement is an astonishing success. Everyone who is now a member of a workplace pension is taking steps towards a more prosperous and better-funded retirement. The fact so few have opted out so far, is testament to the effectiveness of this nudge; most people knew they needed to do this and are just glad someone has helped them make it happen.” 

“There are though still some significant challenges ahead. The most important issue is to build better member engagement with their retirement savings. This will help them work towards saving the right amount every month, to make the most of their investments and to make good choices around how and when to draw a retirement income.” 

The contribution rate challenge (and Brexit) 

Contribution rates are about to rise again, in April this year meaning employers will be obliged to contribute at least 3% and employees 5% of earnings. For most people this isn’t going to be enough. 

Tom McPhail “The pensions industry keeps demanding the government increase the statutory minimum contributions but they’re barking up the wrong tree. The answer to getting contribution rates up to an adequate, or even a good level lies in engaging members to make individual choices about how much they should be saving. It also lies in encouraging them to take control of their investment choices so they can make the most of the money they do save. For many pension scheme members, the default fund is not the best answer.” 

There are concerns the increase in contributions in April will prompt an increase in opt-outs, with more employees baulking at the increase in deductions from their pay. There has been no evidence of this so far, with opt-outs currently running at below 10% of members. 

Tom McPhail “In theory, a hard no-deal Brexit in March, closely followed by an increase in deductions from peoples’ pay could be a toxic combination, leading to an economic slowdown, increased opt-outs or both.” 

Forthcoming changes & outstanding auto-enrolment issues 

In 2017 the DWP conducted a review of auto-enrolment which led to recommendations for reform, including reducing the qualifying age to 18 (currently 22) and scrapping the lower income limit so that contributions would be based on all income from the first £1 earned, rather than disregarding the bottom £6,136 (2019/20 tax year). These reforms will bring more people into auto-enrolment and will increase contributions. These changes are due to be implemented in the mid-2020s but no firm date has been set yet. 

However there are still some other significant outstanding challenges. 

  • The self-employed 
  • Multiple job holders 
  • Orphan pension pots 
  • Bridging members across from auto-enrolment to pension freedom 

In their last election manifesto, the Conservatives boldly promised to find ways to bring the self-employed into auto-enrolment. This is important as there are around 5 million self-employed workers in the UK and only around 17% are saving in a pension. So far no straightforward solution has presented itself. The DWP is trialling various behavioural nudges through 2019. 

Similarly where someone has multiple jobs, for example 2 employments both paying £8,000 a year, they might be earning enough in total to warrant saving in a pension but neither employer would automatically enrol the individual because their income in each job is below the threshold of £10,000. 

There are millions of small ‘dormant’ pension pots, caused when someone leaves a job and their retirement savings are left behind in their former employer’s pension scheme. Multiplied out over people’s working lives and exacerbated by auto-enrolment, there is a risk of billions of pounds going to waste. 

Perhaps the biggest and most important challenge is to turn disengaged pension scheme members who have been auto-enrolled into active investors who can make sensible choices about what to do with their money. The FCA and the DWP are working hard on this, for example by simplifying and standardising the annual pension statements that members receive and by cutting away unnecessary paperwork around people’s retirement choices. 

We also know from our research that engagement with pension scheme members gets easier as their fund value increases; there’s a marked improvement in engagement as fund values increase beyond £5,000. 

The pension dashboard 

The DWP has reiterated its commitment to work with the pensions industry to develop pension dashboards, which will allow individuals to see information about all their pension savings in one place. Whilst enthusiasm for this project remains high, it is still ultimately dependent on the government passing a pensions Act to give it the weight of legal obligation. 

Current auto-enrolment data (December 2018) 

  • Number of employers who have met their enrolment duties: 1,431,753 
  • Total number of workers covered by these employers: 31,145,000 
  • Number of employees enrolled to date: 9,985,000 
  • Workers who were already active members of a workplace pension: 11,457,000 
  • Workers who are still not in a workplace pension: 9,265,000