The drive to encourage savings for work-related pensions is set to regain momentum a decade after the scheme was launched, experts say.
he suggested that minimum contributions to occupational pensions should be gradually increased over the coming years, and highlighted people who are often “pension underserved”, such as the self-employed, people in part-time work, gig workers and some women.
Sir Steve Webb, who was pensions minister at the time of the initiative, said: “When this massive project was planned, the working assumption was that around one in three workers with an employer pension would opt out.
“In reality, the rejection rate was more like one in 10.
“As a result, more than 10 million workers have been brought into retirement savings, many for the first time, and are now enjoying employer contributions as well as – in most cases – tax relief on their pension contributions.
“There was no guarantee that the policy would be successful, but the gradual roll-out, starting with the largest firms, and the gradual increase in contributions, starting with as little as 1% of the worker and firm, gave all participants time to get used to this ‘new.’ normal workplace pension savings’.
Sir Steve, who is now a partner at consultants LCP (Lane, Clark and Peacock), continued: “My biggest regret is that I did not take steps to maintain the momentum after this first phase was completed.
“Since the completion of the initial rollout, the policy has been in limbo and no further steps have been taken to expand coverage or increase contribution rates to more realistic levels.
“Without further action, many who have only started saving for a pension for a small part of their working lives may find that the minimum contributions are simply not enough for a decent retirement.
“They will face the simple choice of saving more, working longer, or facing the financial challenges of retirement. We urgently need to restore the momentum of the first years of AE (automatic enrolment), and in particular to increase the contribution rates.
“My priority will be to move to a combined minimum contribution rate of 10%, which will be funded equally by both employees and employers, and apply from the first pound of earnings.
“Even if these changes have to happen in stages over several years, this path should start as soon as possible.”
This week the Work and Pensions Committee warned that more than 60% of people are at risk of losing an adequate standard of living in retirement.
Minimum pension contributions have increased gradually over the years since automatic enrollment was introduced in October 2012.
The ‘trigger’ for automatic placement of the in-work pension occurs when they earn at least £10,000 from work and are between 22 and pension age.
The total minimum pension contribution is currently 8% of qualifying earnings, made up of at least 3% from the employer and the remaining 5% from employee contributions, which also benefit from tax relief.
Simply paying the minimum is unlikely to give many people the standard retirement income they desire.
Nigel People, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said: “The success of the auto-enrolment policy has reinforced some of its shortcomings: too many people fall short of reasonable pension adequacy…
“This is even more true for recognized groups of people with insufficient pension provision, such as the self-employed, part-time workers, gig workers and those, often women, who are responsible for caring for others.”
He said PLSA believes 12% should be the new default contribution level, saying: “This should be phased in over the next decade.
“This is to be achieved by first reaching a total of 10% in the late 2020s by ‘levelling’ employer contributions (increasing them to match the current 5% employee contribution).
“Second, in the early 2030s, employer and employee contributions would need to increase by a further 1% each to bring employer and employee contributions to 6% each on a 50/50 basis.”
What is important, many do not save at allMark Futcher, Barnet Waddingham
Mark Futcher, partner at advisers Barnett Waddingham, said: “People need to put around 12% of their annual income into a pension fund for a comfortable retirement.
“Most people save far below that, even with employer contributions.
“Importantly, many don’t save at all, either because they’re at the ‘wrong’ age or have multiple jobs so they don’t get auto-enrolled, or because they’ve had to pause contributions to keep up with rising costs of living.”
Emma Douglas, Director of Workplace Savings and Retirement at Aviva, said: “Auto-enrolment has, for the most part, been a stunning success story.
“The biggest challenge that remains is adequacy. Too many pension savers are not contributing enough to provide them with the retirement income they could expect.
We found that the gender gap in pensions begins to widen significantly from the age of 35Emma Douglas, Aviva
“Aviva’s Working Life Report 2022 found that women are significantly more likely to say their workplace pension will not provide enough for them to retire comfortably (40% of women vs. 28% of men).
“We found that the gender gap in pensions begins to widen significantly from age 35, suggesting that women often make important career and childcare decisions and choose to work part-time.”
She called for a “road map” of how and when changes to auto-enrolment would be made, adding: “AE has been largely successful because of the long lead time.
“There should be a similar blueprint for what AE might look like in 2032.”
The pensions industry is campaigning to encourage people to spend a little more time finding out about their pension pots.
Pension Attention manager Sarah Cordy said: “We understand that people have a lot going on, but it’s worth taking the time to check your pensions.
“A lot of people can expect good news, and it’s easy to do.
“Understanding that your employer is also paying and you’re getting a boost from money that would otherwise have gone to the taxman means the savings can add up quicker than you might expect.”
Pension Attention is encouraging people to check account statements and look up old pension statements to find out where their savings are, check what might be coming their way using the pension calculator at pensionattention.co.uk and ask questions of employers, pensioners and/ or go to moneyhelper.org.uk.