Auto-enrolment has been a success so far. Millions more people are saving via a pension scheme and opt-out rates are low. However, during 2017 the government must conduct a review to consider what comes next.
Currently, total contributions under auto-enrolment are just 2% of a set amount of each worker’s salary, and this will rise to 8% by 2019. This will not be enough for an adequate private pension, particularly given the future cuts to the state pension that will occur over time.
One potential solution is the policy of auto-escalation, which would mean a proportion of every pay rise is automatically put into extra pension contributions, unless the worker opts out. This could build contributions to a more adequate level over time. Until recently, less than half of the UK workforce was receiving employer pension contributions. Coverage is now increasing dramatically, but that is only the start.
The review will need to consider how to extend pension saving to parts of the population that are not covered by auto-enrolment. Ministers have indicated their review will consider how to help the self-employed. These workers have no employer to set up a pension scheme for them and add to their own contributions, so the auto-enrolment formula cannot apply.
The behavioural science behind auto-enrolment, taking advantage of the power of inertia, could be used in different ways. Perhaps the self-employed could pay some extra national insurance contributions that would automatically go into a pension scheme (possibly the government-sponsored pension provider Nest if no other choice is made), with the ability to opt out.
Low paid and part-time workers are currently left out of auto-enrolment as only those earning more than the ‘earnings trigger’ of £10,000 a year will be automatically enrolled. Many people who earn more than this are still left out.
People with more than one job, each paying less than £10,000, are not auto-enrolled. This problem mostly affects women and the review could look at ways of combining earnings from multiple jobs, or lowering the earnings trigger so everyone is automatically enrolled.
This is particularly complicated because the rules of auto-enrolment only require pension contributions to start from a lower earnings band of £5,824. Employers do not have to pay contributions on earnings below this level. Paying contributions on the entire earnings would help the lower paid, who otherwise have contributions that are far too small.
Penalising the poor
The review should highlight the huge injustice for low paid workers whose employers use net pay pension schemes. It cannot be right that the government allows employers and pension schemes to force people earning under £11,000 a year to pay 20% more for their pensions than higher earners. Such penalties, which deny workers the tax relief they should get, are unacceptable.
There are other important areas for the review to consider, such as embedding financial education into workplace auto-enrolment schemes to improve the way the policy works for people, along with consideration of default decumulation options and charging levels. These should all be on the table.
I expect ministers will consider extending auto-enrolment beyond pensions. There is likely to be discussion of enrolling workers into ISAs and introducing some saving plans for long-term care. Retirement in the 21st century is about more than just pensions, as increasing numbers of people will need to have money set aside to pay for care.
Overall, the review should be a wide-ranging reconsideration of auto-enrolment but we will have to wait and see whether it brings long-term positive change.