Momentum of the early years of workplace pensions drive ‘needs to be regained’

The drive to encourage saving into workplace pensions needs to regain momentum, a decade after the scheme started, according to experts.

They suggested that minimum contributions into workplace pensions should be gradually increased further in the years ahead and also highlighted people who are often “under-pensioned”, such as the self-employed, people working part-time, gig workers and some women.

Sir Steve Webb, who was pensions minister when the initiative launched, said: “When this massive project was planned, the working assumption was that around one worker in three who was put into a pension by their employer would choose to opt out.

“In reality, the opt-out rate has been more like one in 10.

“As a result, over 10 million workers have been brought into pension saving, many for the first time, and are now benefiting from an employer contribution as well as – in most cases – tax relief on their pension contributions.

“There was no guarantee that the policy would succeed, but a gradual rollout, starting with the largest firms, and a phased increase in contributions, starting at just 1% from worker and firm, gave everyone involved time to get used to this ‘new normal’ of workplace pension saving.”

Sir Steve, who is now a partner at consultants LCP (Lane, Clark and Peacock), continued: “My biggest regret is not putting in place measures to keep the momentum going once this first phase was over.

“Since the initial rollout was completed, policy has been in limbo with no further steps taken to expand coverage or get contribution rates up to more realistic levels.

“Without further action, many of those who only started pension saving part way through their working life could find that minimum contribution levels are simply not enough to fund a decent retirement.

“They will face a simple choice – save more, work longer or face a financially challenged retirement. We urgently need to regain the momentum of the early years of AE (auto-enrolment), and in particular to get contribution rates up.

“For me, the priority would be to move to a combined 10% minimum contribution rate, funded equally by worker and employer, and applying from the first pound of earnings.

“Even if this change was to be phased in over a number of years, that journey needs to start as soon as possible.”

According to official data, around eight in 10 employees were participating in workplace pension schemes last year – representing a massive jump compared with less than half back in 2012.

Department for Work and Pensions (DWP) Parliamentary Under Secretary of State Alex Burghart said: “Over the last 10 years, automatic enrolment has transformed pension saving in the UK.

“More than 10.7 million workers have been enrolled into a workplace pension to date, with an additional £33 billion saved in real terms in 2021 compared to 2012.

“It’s particularly pleasing to see the increase in participation among women and young people – two groups historically less well served or excluded from workplace pensions.

“Just 40% of eligible women in the private sector were participating in a workplace pension in 2012 – in 2021 this had reached 87%.

“For those aged 22 to 29, participation skyrocketed from 35% in 2012 to 86% in 2021.

“Our ambitions for the future of automatic enrolment will help people save more, starting earlier, while the introduction of pension dashboards will bring pensions into the digital age and transform how the record number of UK savers think about and plan for their retirement.”

The Work and Pensions Committee warned this week that more than 60% of people are at risk of missing out on an adequate standard of living in retirement.

Minimum pension contributions have been gradually increased over the years, since the introduction of auto-enrolment in October 2012.

The “trigger” for someone to be automatically placed in a workplace pension happens if they are earning at least £10,000 in a job and they are aged between 22 and state pension age.

The total minimum contribution into pensions is currently 8% of qualifying earnings, made up of at least 3% coming from the employer and the remaining 5% from employee contributions, which also benefit from tax relief.

Just paying in the minimum is unlikely to give many people the standard of retirement income they want.

Nigel Peaple, director, policy and advocacy, at the Pensions and Lifetime Savings Association (PLSA), said: “The success of the automatic enrolment policy has magnified some of its shortcomings, with too many people falling short on reasonable definitions of pensions adequacy…

“This is even more acute for recognised under-pensioned groups, like the self-employed, part-timers, gig workers, and those, often women, responsible for others’ care.”

He said the PLSA believes that 12% should become the new default contribution level, saying that: “This should be introduced on a gradual basis over the next decade.

“This should be achieved by, firstly, in the late 2020s reaching a total of 10% by ‘levelling up’ the employer contributions (increasing them so that they match the current employee contribution of 5%).

“Secondly both employer and employee contributions should increase by a further 1% each in the early 2030s so that employer and employee contributions both reach 6% each on a 50/50 basis.”

Mark Futcher, a partner at consultants Barnett Waddingham, said: “For a comfortable retirement, people need to be saving around 12% of their annual income into their pension pot.

“Most people are saving well below that, even accounting for employer contributions.

“Crucially, many aren’t saving at all, either because they’re the ‘wrong’ age or earning across multiple jobs so aren’t caught by auto-enrolment, or because they’ve had to pause contributions to keep up with the rising cost of living.”

Emma Douglas, director of workplace savings and retirement at Aviva, said: “Auto-enrolment has, for the most part, been a resounding success story.

“The biggest remaining challenge is adequacy. Too many pension savers are not contributing enough to provide them with the retirement income they might be expecting.

“Aviva’s working lives report 2022 found that women are significantly more likely to say that their workplace pension will not provide enough for them to have a comfortable retirement (40% of women versus 28% of men).

“We have found that the gender pension gap begins to widen significantly from the age of 35 – suggesting women often making milestone career and childcare decisions and opting to work part-time.”

She called for a “roadmap” to be put in place now for how and when changes to auto-enrolment will be implemented, adding: “AE was largely a success because of the long lead-time.

“There needs to be a similar plan for what AE might look like in 2032.”

The pensions industry is running a campaign to encourage people to spend a little more time finding out about their retirement pots.

Pension Attention campaign manager Sarah Cordey said: “We understand that people have a lot going on but it’s worth taking the time to check up on your pensions.

“Plenty of people can have good news waiting for them and it’s easy to do.

“Understanding that your employer is paying in too, and you get a boost from money which otherwise would have gone to the taxman, means savings can build up faster than you might expect.”

The Pension Attention campaign urges people to check payslips and look out for old pension statements to find out where their savings are, check what could be coming their way by using the pension calculator at pensionattention.co.uk and ask questions of employers, pension providers and/or go to moneyhelper.org.uk.