More than a decade on from auto-enrolment, the majority are under-saving for retirement
Times are strange. ”Crisis” seems to be a fitting word for what is happening right now. As inflation hovers around ten per cent, the cost of living is certainly impacting many people – pension reform is understandably not what most people care about right now. You can forgive them for that – why worry about your retirement in potentially 20+ years when you are worried about being able to afford your mortgage right now? The trouble is – times are tough now, but they’ve been tough for a while. The pandemic had a major impact on people, and now as we seem to be emerging from that we’ve been dealt another blow.
The problem is, government are always going to have a reason why it’s not the right time to look at the current auto-enrolment regime and whether it is fit for purpose. The truth is, most people with defined contribution pensions aren’t going to be retire when they would like to, or if they do retire, will find they won’t be living the lifestyle they hoped for.
Auto-enrolment is something that affects millions of working adults in the UK, particularly since inadequate retirement provisions that fuel pension poverty are becoming increasingly prevalent. Regrettably, more than a decade on from the introduction of automatic enrolment in workplace pensions, the majority of these people are under saving for retirement, or worse yet, aren’t even within the scope for it.
The minimum contributions an employer needs to make in respect of an employee that is auto-enrolled is around 3% of their annual salary so long as the employee contributes at least 5% of their annual salary. This isn’t a big number. A contribution of 8% of annual salary is not enough to achieve the type of pension most employees would like. Add to this that the legislation steers organisations to base contributions on what is known as “qualifying earnings” which currently is £6,240 – £50,270. This means for most employees’ contributions aren’t even based on their entire salary.
This outlook only gets bleaker when comparing the typical levels of return from DC pensions and the more generous defined benefit alternative. It is now rare for a private sector employee to find themselves in a defined benefit sector scheme, but those in the public sector still benefit from these. As a comparison, the typical employer contribution for these schemes could be equivalent to 15-25% of annual salary. A bit of a difference.
For those that aren’t in scope for auto-enrolment, they don’t even get to benefit from what are essentially “free” employer contributions. People who currently don’t benefit from auto-enrolment include those under 22 years and those earning less than £10,000 a year. Students with part-time jobs and those with multiple jobs are affected by these requirements. We should be encouraging young people to start saving for retirement as soon as they can. For those people entering the workforce at 18 years old on a salary of over £10,000 a year, they will have to wait four years before receiving any pension contributions from their employer.
Employers can choose to enrol these employees and make contributions in respect of them, but there is no obligation to.
There have been calls to extend the scope of auto-enrolment. The Automatic Enrolment Review 2017 recommended that auto-enrolment be extended to include those aged 18-22, and that the lower qualifying earnings threshold be removed. The Conservative MP Richard Holden introduced a private member’s bill laying the groundwork to introduce reforms echoing the 2017 Review. A second reading of the bill is scheduled for November, subject to sufficient parliamentary time being allocated. Time will tell if the bill progresses. It has already been halted once.
For those that argue that now is not the time, auto-enrolment is about choice, not coercing employees to save for retirement. Employers cannot know the circumstances of each employee, but if auto-enrolment was extended, everyone could choose whether to opt-out of auto-enrolment therefore opting out of the free employer contributions. At the moment, the choice is made for 18 year olds and those who don’t earn over £10,000 a year. Something about the lack of choice doesn’t seem fair, does it?
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. Arc Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.