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Malcolm McLean: Will auto-enrolment be just another wasted opportunity?

Auto-enrolment’s success will come tumbling down if contribution increases are not addressed properly

You will not find many commentators who would deny that auto-enrolment has been a major success to date.

Certainly, the results so far are very impressive, with opt-outs at well below 10 per cent and membership of workplace pension schemes reaching record levels.

According to recent data from the Office for National Statistics, the proportion of employees contributing to a workplace pension reached 73 per cent last year, up from 47 per cent in 2012 when auto-enrolment first started.

This means 9.5 million new pension savers have arrived on the scene – a figure that probably surpasses anyone’s expectations.

The data also confirms that the increase in pension scheme membership has been most marked among young and low-paid workers, which, given the current talk about intergenerational differences and unfairness, is equally remarkable.

Delving into default pension funds

That said, the good news largely ends there. Indeed, the ONS data also shows that, while the numbers contributing are increasing, the average amounts being contributed are following a reverse trend.

Since the introduction of auto-enrolment, pension contributions have clustered at the very low minimum levels required by law. In 2017, almost half of private sector employers with defined contribution schemes contributed less than 2 per cent of employees’ pensionable earnings, compared with about 6 per cent in 2012.

This is disappointing but not totally unexpected. It was always a possibility that, by setting such a low base and phasing in modest increases gradually over time, most of the new savers would be starting at an inadequate level and would be most unlikely to get the sort of pensions in retirement they needed, unless something changed significantly.

While the government’s phased increases should see minimum contributions rise to 8 per cent in 2019, there is still a risk this will not be anywhere near enough.

In fact, a combined contribution rate of 8 per cent between worker and firm is simply not good enough for most. It needs to be increased to perhaps as much as 12 per cent as soon as possible.

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I can understand the government’s caution in taking its time getting auto-enrolment off the ground, not wanting to jeopardise the gains that have been made so far.

It has already confirmed it is closely monitoring the impact of the most recent increase in contribution level to 5 per cent to “inform its approach” to supporting the second planned increase next April. Hopefully, this does not mean there is any possibility of the rise being curtailed or even cancelled.

It is time to adopt a more robust approach and get the contribution levels up further – via whatever means that may be. The self-employed must also be brought in to the auto-enrolment ambit without further delay.

As ever, history will judge the success of any enterprise, however big or small, by the results it achieves. And in the words of the old musical ditty: “it’s not where you start, it’s where you finish” that counts.

If, in 10 or 20 years’ time, auto-enrolment is found to have delivered only relatively small pensions out of keeping with the needs of those who have saved in good faith with it, then the policy will have failed.

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That is something those with the wisdom and foresight to have set up auto-enrolment in the first place clearly do not want to see happen. Nor will any future government.

With an ageing population and pressure building on state funding, private pension provision will be vital to ensure tomorrow’s pensioners can enjoy a decent standard of living throughout their retirement years.

As things stand, auto-enrolment is the only game in town, so it is key to bringing that about.

Malcolm McLean is senior consultant at Barnett Waddingham

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  1. Not a wasted opportunity – just a waste of time. We have already seen one provider go belly up. The pensions themselves are really rubbish (see the most recent reports on default funds).

    These will ultimately go the way of Stakeholder. The real solution is (and always was) a decent State Pension. AE is nothing but tax, but with an opt out. So just increase tax (but ring fence it) and provide better State Pensions. As it is we pay the most parsimonious state pension in the whole of the OECD (as a percentage of national average earnings)

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