How do you get someone to do something? You make it harder for them not to do it. This is the whole premise of auto-enrolment.
The scheme has been hailed as a great success and in some ways it has been. More people than ever save into a workplace pension — £28 billion more in 2020 than in 2012, according to the Department for Work and Pensions.
But while successful, auto-enrolment could soon turn into one of our biggest savings disasters if we’re not careful. I’ll tell you why.
Auto-enrolment was meant to get the workforce saving for retirement. From 2012 it made sure that most workers in the private sector were automatically enrolled into their company’s pension scheme, as long as they were at least 22 years old and earning at least £10,000 a year.
You don’t need to fill in any complicated paperwork or opt in — you simply start a job and then you get a pension.
But while the scheme ensures that employees save some money towards retirement, it has also allowed employers toget more stingy with their contributions.
Defined benefit (DB) (also known as final salary) pension schemes, which provide a guaranteed, inflation-linked income for life that’s linked to your salary and length of service, used to be the norm in the private sector. They were so expensive to run that they have all but disappeared — and so have the generous employer contributions that went with them.
Back in 2011, before auto-enrolment, private sector DB scheme employers contributed a hefty average of 14.2 per cent of a worker’s salary to their pension, according to the Office for National Statistics.
Today they are obliged to contribute just 3 per cent into auto-enrolment defined contribution (DC) schemes, where what you get in retirement is based on your contributions and investment growth. Employees have to pay in at least 5 per cent.
Over the past three years alone, company payments into staff pensions have fallen 16 per cent — 30 per cent if you take inflation into account — according to the Financial Times last week.
That downward trend is set to continue after this month’s rise in the employer national insurance rate from 13.8 per cent to 15 per cent. Many businesses simply can’t afford to be more generous than the minimum requirements.
And here’s the real problem: most employees don’t realise that their workplace pension scheme will not be enough.
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Auto-enrolment has given people a false sense of security that they are saving enough for old age, even though many are not. Research by the Institute for Fiscal Studies (IFS), a think tank, suggests that approximately 30 per cent to 40 per cent of private sector employees (5 to 7 million people) saving in DC pension schemes are on course for incomes that fall short of what they are likely to need in retirement.
And while the number opting out of auto-enrolment has remained low, auto-enrolment has not created a generation of engaged savers. Most do not take an active interest in their pension — this can be seen in the high proportion of savers that are invested in their pension firm’s default fund. The number who have increased their contributions above the minimum required has also remained low. Less than half of private sector employees pay in more than the minimum contribution, according to the IFS.
Here’s the truth: just because you have been automatically enrolled in a pension, it doesn’t mean that your pension has been taken care of. Likewise, a default contribution rate doesn’t mean a recommended rate.
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More savings — ideally by employers and employees — are needed to generate adequate incomes in retirement. It may not be what we want to hear, but a hefty dose of reality is necessary if we are to avoid a future retirement crisis.
