Hard as it is to believe, auto enrolment is five years old. During that time, nearly 8 million people have begun saving for retirement thanks to the efforts of more than 500,000 employers.
To get to this point has been a huge achievement and the result of genuine collaborative working between government, regulators, the industry and employers and their advisers. Opt outs remain low and compliance remains high. All good news! In fact, this social experiment has gone better than anyone dared to hope.
But, there’s still some way to go before we can all sit back and declare auto enrolment a success. Nearly 700,000 small and micro employers are still to reach their staging dates; new employers will have to comply immediately and then there’s the question of navigating through the increase in minimum contributions while avoiding any uptick in opt outs.
Longer term there’s the bigger question of whether auto enrolment is going to provide savers with a pension pot sufficient for a comfortable retirement and whether it’s covering enough of the right people.
The 2017 auto enrolment review will publish its findings towards the end of the year and will examine which further groups could benefit from being included in auto enrolment. It can include more people by changing the auto enrolment trigger (currently £10,000pa), the age criteria and the qualifying earnings bands.
To cement the success of auto enrolment, we must eradicate the qualifying earnings bands so that auto enrolment contributions are on every pound of earnings rather than just on earnings between £5,876 and £45,000pa.
Research we conducted last year with auto enrolled savers revealed nearly two thirds are unaware that minimum contributions only apply to a band of earnings and more than half said they would prefer their pension contributions to be paid on every pound of their salary to increase the amount that goes into their pension pot.
The qualifying earnings calculation means that all savers miss out, but lower earners and part-time workers are disproportionately impacted. What this means is that for somebody earning £10,000, only £4,124 of their salary counts for auto enrolment. Long term this will have a highly corrosive impact on savers’ pension pots.
Removing qualifying earnings would significantly improve outcomes for all savers and would be a relatively simple change to the legislation which could be phased in so that employers are able to prepare for the increased cost. An 8% pension contribution needs to genuinely mean 8% – and that’s the fairest way to increase contributions right now.
Looking ahead we also need to ensure that as many people as possible have an opportunity to save. While nearly 8 million people are saving as a result of auto enrolment, nearly 7 million have been disbarred because they don’t meet the age or salary criteria.
Many of those who don’t meet the salary criteria are part-time workers and an analysis of these workers by the Pensions Policy Institute showed that over three quarters are women.
I sincerely hope the auto enrolment review makes a clear recommendation to extend auto enrolment to everyone and base contributions on total earnings stamping out unfair workplace discrimination before it becomes embedded in our pension system.
- Adrian Boulding, Director of Policy, NOW: Pensions