October will mark 10 years from the introduction of automatic enrolment (AE) in 2012, and it’s clear that the policy has had many positive impacts on pension saving.
This milestone presents an opportunity to reflect on the successes of AE, while also considering the areas where more could be done in order to better support positive retirement outcomes.
Increased pension participation
As of June 2022, 10.7 million employees have been automatically enrolled and 974,000 automatically re-enrolled, having opted out previously.
Despite concerns that opt-out rates would increase, they have remained broadly stable.
Prior to the introduction of AE, the Department for Work & Pensions’ (DWP) impact assessment predicted that around one in three people would opt out.
There needs to be consensus on how best to build upon the success of automatic enrolment
As AE was gradually rolled out, there were concerns that opt-out rates might increase, either once smaller employers reached their staging dates or as minimum contribution levels increased.
However, over the first decade of AE, opt-out rates have been at consistently lower-than-expected levels – around one in 10 – throughout staging and contribution increases, as well as through the peak of the Covid-19 pandemic (some schemes reported slightly increased opt-outs in the short term in 2020, but this subsequently stabilised back at lower levels).
Private sector impact of AE
AE has increased workplace pension participation, particularly in the private sector. In 2012, only 46.5% of employees participated in a workplace pension. By 2021, participation had grown to 79.4%.
Meanwhile, the gap between participation in the public and private sectors has also narrowed.
Participation in the public sector increased from a relatively high base of 83% in 2012 to 91% in 2021, while participation in the private sector grew from 32% to 75% over the same period.
However, there are still many who are unable to access the benefits of AE.
Ineligible for AE
The number of employees found ineligible for AE has been growing at a greater rate than those found eligible. Characteristics that are associated with ineligibility or lower levels of eligibility include:
- Younger savers: AE is currently limited to workers aged between 22 and State Pension age. Reducing the age of eligibility for AE, from 22 to 18, as recommended by the 2017 Automatic Enrolment Review, could increase eligibility by around 2.8%.
- The self-employed: Including around 4.1 million people, this group is excluded from accessing the benefits of AE because they do not have an employer who can enrol them and contribute on their behalf.
- People on low earnings: AE eligibility currently requires earnings of above £10,000 in a single job. Removing this threshold could increase eligibility by 9%.
- People with multiple jobs: Of the 10.5 million workers found ineligible, almost 106,000 workers, of whom 70% are women, are not being automatically enrolled because their earnings come from more than one job.
Under-pensioned groups including women, people from black, Asian and minority ethnic backgrounds, carers and people with disabilities are disproportionately likely to fall into one of the above groups and therefore to be ineligible for AE.
Contribution levels too low
There are also concerns that current contribution levels are unlikely to deliver adequate retirement outcomes
The 2017 review recommended reducing the lower earnings band for contributions to £0, so both employees and employers would pay contributions based on the first pound of earnings up to the higher earnings band.
There are still many who are unable to access the benefits of automatic enrolment
The DWP’s ambition is to implement this policy in the mid-2020s. If enacted, this will increase saving levels for those whose employer contributes based on band earnings, and would have the greatest proportional impact on lower earners.
Now that all scheduled minimum contribution rate increases have been implemented, there have also been recommendations across industry for further increases to be considered.
While past increases have not resulted in substantial increases in opt-outs, any further increases must be balanced against the potential risk of encouraging higher opt-out rates.
The Association of British Insurers (ABI) has called for default contribution rates to be increased to 12% from 2023, with either an opt-up or opt-down mechanism, meaning that savers can choose to contribute at a lower rate but must make an active decision to do so.
As we approach the 10th anniversary of AE, as well as the mid-2020s (the time at which the government has said it intends to introduce the recommendations of the AE review), there needs to be a consensus about the most effective way to build on the policy’s successes, and increase its reach.
After all, part of AE’s success has come from consensus and co-operation across the government, industry and employers.
Comments