Suddenly millions more are paying into a workplace pension. The number contributing to a private defined contribution scheme at work was fairly stagnant for years, at around one million. But then, in 2014, it started growing. By 2016, it had reached 6.4 million.
The rise is due to automatic enrolment. Just about every employer now has to have a pension scheme in place and automatically put its workers into it.
Good news so far. But other figures in the latest Occupational Pension Schemes Survey from the Office for National Statistics are much less encouraging. The average amount going into those schemes in 2016 was just 4.2 per cent of pay. That is less than half the 9 per cent average in 2013 before auto-enrolment began, and less than a fifth of the 22.7 per cent being paid into defined benefit schemes. If less than a fifth is going in, then less than a fifth will be paid out in pensions.
There is a glimmer of hope. The amount going into DC schemes has ticked up from 4 per cent in 2015 (though when I asked ONS why that 0.2 percentage point rise had happened the answer was it might just be “sample variation”).
The detail shows employer contributions rose from 2.5 per cent to 3.2 per cent while the average employee’s contribution fell from 1.5 per cent to a record low of just 1 per cent.
These depressing figures reflect the diluting effect of the very low contribution levels set by the Government for auto-enrolment. This year, the nominal amount is 1 per cent each from employer and employee. In practice, it is a lot less: just 1.2 per cent in total for those on the national living wage.
Contributions will rise in April and then again a year later to what the government calls 8 per cent – split 5 per cent from the worker and 3 per cent from their firm. Except it is not. These percentages are applied to a band of earnings which this year runs from £5,876 to £45,000. So for those on low pay, the percentage of their total earnings being paid in is much less.
That 8 per cent of the band cannot possibly provide more than 7 per cent of total pay and that is only achieved by someone earning £45,000. A person on median pay of £26,260 will have just 6.4 per cent of total pay paid in. And the group who auto-enrolment was really intended to help – those on low incomes – will get less still.
A person earning the national living wage of £7.50 an hour working 37.5 hours a week will have just 4.8 per cent of their pay going into their pension. That includes the modest subsidy from taxpayers of £70 in the year. Compare that with the subsidy given to someone paying top rate, 45 per cent tax. If they pay £10,000 from their net earnings into a pension, they get it topped up by a gift from the Treasury (you and me) of £8,182.
These tiny amounts going in – just £700 a year from someone on the national living wage – are not going to buy much of a pension. Today, a healthy 65-year-old would need around £260,000 to buy an annuity equal to the index-linked new state pension of £8,297 a year. How long would someone have to pay into an auto-enrolment pension to have that much at 65?
Time for a spreadsheet – and some assumptions. First, the employer joins the Nest scheme. That levies an initial charge on each contribution of 1.8 per cent and then a 0.3 per cent annual charge. That is cheaper for periods over 10 years than the average 0.64 per cent annual charge, with no initial charge, of the other master trust schemes listed by The Pensions Regulator.
Second, the fund grows at 4 per cent a year before charges. Third, scheme pension age is 65 and the starting age is 22.
Forty-three years saving full auto-enrolment contributions into the Nest scheme would only achieve £260,000 if the employee earned £36,500 – about 1.4 times the median. Someone on median pay would get just £173,200, only enough to buy an index-linked pension of £5,600 a year. Someone earning the national living wage would have just £74,300 in their pot and could buy a pension of £2,400.
One reason the amount is so low is that employers are getting pensions on the cheap. Auto-enrolment reverses the ratio between employer and worker. It is the workers who pay the bigger share of the contributions – a ratio of five to three. Until auto-enrolment, it was the other way round: the average 9 per cent paid into DC pensions was divided roughly two to one between employer and worker.
Full auto-enrolment contributions paid by an employer for a worker on median pay will be just 2.3 per cent of total pay. That falls to 1.8 per cent for those on national living wage. Compare that with the 16.9 per cent paid in by firms with a DB scheme. Not to mention the 54.6 per cent contribution paid by the Bank of England for some of its staff.
The one change that would most help people achieve a decent pension in retirement is employers paying in twice as much as their employees, as used to happen before auto-enrolment.
Not all employers want to pay even 1.8 per cent. The auto-enrolment review – which will report to Parliament by the end of the year – has been lobbied by the Confederation of British Industries and National Farmers Union to exempt farmers and other employers from the “unnecessary burden” of auto-enrolling seasonal workers.
So not only do farmers build without planning permission, pay no inheritance tax and get a tax-free subsidy of £215 for every hectare they own, they now want to employ a person on the minimum wage and not pay into a pension for them. At current rates, that would only cost them £87 a year. Or, as farmers call it, an acre. Cheap indeed.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney