For the 3.2 million workers introduced to pension saving between 2012 and 2014, auto enrolment has undoubtedly been a success. But the recent government progress report on auto enrolment shows that when it comes to how much is actually being saved, there is considerably more to be done.
The Department for Work and Pensions (DWP) has rightly set itself two targets for monitoring the success of auto enrolment. The first is the number of people saving in auto enrolment schemes, and the second is the amount they and their employers are paying in. For the first of these measures all is going well, but for the second, there is still a long way to go.
Reverse of long-term downward trend in pension saving
DWP figures show auto enrolment has already successfully stopped the long-term downward trend in pension saving in the UK. Between 2004 and 2012, take-up of workplace pensions fell from 63 per cent of the employed population to 55 per cent. Auto enrolment, which kicked off in October 2012 with the nation’s biggest employers, has not only reversed the decline, but coverage actually increased to 70 per cent by the end of 2014. With nearly two million employers still yet to enrol staff, near universal take-up appears within reach.
The long-term decline in pension scheme membership in the last decade was particularly drastic in the private sector, where the percentage of workers in schemes fell from 53 per cent in 2004 to just 42 per cent by 2012. Thankfully the rebound has been more pronounced here too, with coverage rising 21 per cent in just two years to 63 per cent by the end of 2014. Pension take-up was particularly strong in the distribution, hotels and restaurants sectors, with 59 per cent of eligible workers being members of schemes at the end of 2014, compared to just 37 per cent in 2012.
Low earners excluded from auto enrolment
The optimistic headline numbers however don’t tell the full story. It’s important to remember that auto enrolment only applies to those that earn more than £10,000 a year. For the millions of workers earning less than that, some of whom have several jobs that combined together would take them above that figure, the picture is not so rosy. While two years of auto enrolment has boosted the percentage of those earning between £10,000 and £20,000 a year in schemes from 21 to 50 per cent, take-up amongst those earning less than £10,000 remains stubbornly just above the 20 per cent mark.
Too many members are contributing too little
The DWP’s figures also show a marked decline in the average amount saved per employee. This is in part because many of the millions recently auto enrolled have done so at the minimum level. But even when these contribution rates have been fully phased in up to 5 per cent of the employee’s band earnings plus 3 per cent from the employer, they will remain woefully inadequate.
The approach of only applying these percentages to earnings between £5,824 and £42,385 means someone earning £20,000 a year can only ever hope to contribute 8 per cent of £14,176, which is actually 5.6 per cent of earnings. Meanwhile for someone on £15,000, 8 per cent of qualifying earnings actually means just 4.9 per cent of actual earnings.
Saving less than 6 per cent of earnings over a working life of 40 years is not going to generate enough to fund a retirement that will probably exceed 20 years. Industry recommendations for adequate savings rates range between 12 and 18 per cent. To get anywhere near these levels we need to abolish the band earnings approach, which misleads workers into thinking they are saving more than they actually are, lower the threshold for qualification for auto enrolment and develop a political consensus towards increasing contributions over time.
Auto enrolment is certainly succeeding on its objective of getting workers into schemes, but when it comes to providing them an adequate pension into retirement, it still has some way to go.