Steve Webb: The fool’s paradise of automatic enrolment

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We have all seen the endless reports warning we are going to have to work until we drop. I suspect most members of the public that read such stories are tempted to put their head back under the duvet.

Certainly, there is little evidence rules of thumb, such as telling people they need to save “half their age” as a percentage of their income in order to achieve a decent retirement, have any impact on getting people up to the right level.

An interesting question is whether automatic enrolment combined with the new state pension will change all that. Soon, the vast majority of workers will, for the first time, have a pension of their own, while the amount they get from the state will be far more predictable than in the past.

Given the Government sets the mandatory rate of contributions into a workplace pension as well as the rate of the new state pension, citizens could be forgiven for thinking such figures will have been chosen to give them the sort of pension they will need for a decent retirement but they would be sadly mistaken.

A recent report we published, entitled The Death of Retirement, asks what sort of retirement people will get if they simply do what the Government says: contribute 8 per cent of qualifying earnings into an auto-enrolment scheme and draw a full state pension. The results make shocking reading.

To get the sort of “gold standard” pension of previous generations, with combined state and private pension of two-thirds of pre-retirement income, an average earner would have to contribute at the 8 per cent level every year from age 22 to age 77. Even a more modest “silver standard” of half of pre-retirement income would not be reached until age 71.

Of course, many people do not start saving in their twenties. But those that leave it to their mid-thirties and only contribute at the statutory minimum level will not be able to stop work until their late seventies if they want a gold standard pension. If they wait until 45, they can expect to celebrate their 80th birthday at their workplace before being able to afford to retire.

What makes the situation worse is most people do not contribute every year of their working life. For women in particular, who are more likely to have years out of paid work and may return to a part-time rather than a full-time role, the prospects look bleak in retirement if they only contribute at the basic level.

None of this is to say there is anything wrong with auto-enrolment as such. It is a huge achievement that in 2017 we are likely to see around 10 million people starting to build up a workplace pension that had no such savings just five years earlier. However, the amounts going in are woefully inadequate.

There is a good case for breaking people in gently and so I have no problem with the phasing of contributions from 2 per cent currently to 5 per cent in 2018 and 8 per cent thereafter. But we simply cannot stop there. Employers, advisers and providers should all be coming up with ways to get people to contribute more and the Government should already be thinking about how we can build on the lessons of auto-enrolment to get people beyond 8 per cent without mass opt outs.

By far the best solution remains default auto-escalation: the presumption that, unless you opt out, each pay rise will trigger a rise in your contribution rate.

There is no denying auto-enrolment has been a success but without further action there is a danger millions of people will reach later life unable to retire on the sort of income they need for a good quality of life. And they will ask us how we let it happen.

Steve Webb is director of policy at Royal London