Troy Clutterbuck, CEO, NOW: Pensions
Earlier this week, The Department for Work & Pensions (DWP) published a report on workplace pension participation and savings trends.
Perhaps not the most scintillating read you might think. But, what it proved was that auto enrolment is working in reversing a persistent decline in workplace pension saving.
Between 2007 and 2012 there was a general downward trend in workplace pension participation, from 60% to a low of 55%.
Since 2012, when auto enrolment was introduced, there has been a huge increase of 6.9 million to 17.7 million eligible employees participating in a workplace pension (84%) in 2017.
The biggest improvements are in the farming and fisheries industry where participation has soared from just 18% in 2012 to 68% in 2017. The hotel and restaurant sector has also seen participation increase from 27% in 2012 to 77% in 2017.
However, with more savers paying minimum contributions, the average amount saved per employee has declined steadily from £6,800 in 2012 to just £3,900 per eligible employee in 2012.
In public sector schemes, the picture is somewhat different with public sector employees now having twice the pension savings of those in the private sector (£8,400).
Although minimum contributions will rise to 8% of qualifying earnings in April next year, this alone won’t be enough to bridge the growing gap between public sector and private sector pension savings.
To prevent private sector savers being bitterly disappointed when they reach retirement, government need to grasp the adequacy nettle. A good starting point for this will be basing contributions on every pound of earnings – a change recommended in the 2017 auto enrolment review.
At the moment, auto enrolment minimum contributions are only calculated on a band of earnings between £6,032 and £46,350 a year. This means the first £6,032 of an employee’s earnings does not count for the purposes of auto enrolment nor do any earnings over £46,350. This has a highly corrosive effect on savers’ funds and needs to go as we argue here.
Over the long-term, the target has to be to increase contributions to 12 – 15% with a more even split between the employer and employee.
When auto enrolment is fully rolled out, UK employers will bear just 37.5% of the contribution burden which is out of step with many other countries that have nationwide automatic enrolment schemes or nationwide DC schemes.
The report commissioned by NOW: Pensions carried out by the Pensions Policy Institute, revealed that the UK is out of step with Italy where employers bear 85% of the burden, Denmark where they bear 66.7% in and Japan where employers bear at least 50%.
The only country which is less generous, is New Zealand where some employers bear only 27% of the burden.
Rebalancing contributions would make increasing minimum contributions more palatable for savers but would need to be phased in to allow employers adequate time to prepare.
Solving the challenge of adequacy is far from simple. But, the longer we fail to tackle it, the wider the gap between the fortunes of public and private sector workers will become.