Auto-enrolment and the creation of the National Employment Savings Trust, the UK's new universal pension provider, were introduced to tackle the UK’s emerging pension saving crisis because increasing numbers of people were heading towards retirement with little or no pension savings.
The policy has been a success with 6 million more pension savers and pension participation boosted to 84% of eligible employees by 2017.
But Andrew Bailing, chief executive of the Financial Conduct Authority, recently warned that 15 million people were not saving enough for retirement.
There is a still a pension saving crisis and more action is needed to build on the success of auto-enrolment.
Pension Commission and auto-enrolment
Auto-enrolment and the introduction of NEST, a universal pension provider, were the result of recommendations by the Pension Commission chaired by Lord Turner.
The commission was established to address the emerging pension saving crisis and produced reports in 2004 and 2005.
Employers are now required to provide a workplace pension, enrol their employees into the pension and contribute to their employees' pensions, (this is only for employees who earn more than the £10,000 earnings trigger and are between 22 and State Pension Age).
This is a great improvement on the previous requirement on employers to make a stakeholder pension available to employees.
The minimum contribution level for employers began at 1% of ‘qualifying earnings’. It increased to 2% on 1 April 2018.
The employer rate will increase again to 3% on the 1 April 2019.
The overall minimum total contribution began at 2%. It increased to 5% in April 2018 and will increase again to 8% from April 2019.
This means that employees with employers who pay the statutory levels have had to pay 3% since April 2018. This will increase to 5% in April 2019.
Employees with employers that pay above the statutory level only have to pay contributions that, with their employer’s contribution, meet the minimum total level.
A key concern is that individuals saving at the minimum level will still have inadequate savings at retirement.
How much should I save for retirement?
A commonly used guide to estimate how much you should save for retirement is to halve the age at which you first started saving for retirement.
This would be 9% for an 18-year-old, 10.5% for a 21-year-old or 12.5% for a 25-year-old.
General guidance also recommends amounts between 10% and 20% depending on your age and income.
The 8% total contribution rate that will exist from April 2019 falls short of these amounts.
TUC – Fixing the retirement lottery
To build on the success of auto-enrolment, the Trades Union Congress has campaigned for the abolition of the £10,000 earnings trigger and the earnings threshold to ensure that more of the lowest paid workers are auto-enrolled and that they can pension their first pound of earnings.
The TUC also believes the starting age of contributions should be reduced from 22 to 18.
The government has now committed to reducing the starting age and abolishing the lower earnings threshold, but is yet to legislate for this to happen.
The TUC’s Fixing the Retirement Lottery report details their verdict on the problems and proposals for the future.
Pensions and Lifetime Savings Association
The auto-enrolment contribution structure started with equal contributions between employers and employees.
However, increases to minimum rates in April 2018 and 2019 have now weighted contributions towards employees paying more.
The Pensions and Lifetime Savings Association report 'Hitting the Target: A Vision for Retirement Adequacy' outlined an agenda for future government reform of pensions to ensure retirees have adequate savings for retirement.
They recommend that minimum total pension contributions are increased from 8% to 12% by 2030 on an equal matching basis between employee and employer contributions.
This would see the minimum employer contribution rise from 3% to 6% and employee contributions rise from 5% to 6%.
These proposals are interesting. Restoring employer matching at the minimum level would make pensions more attractive to individuals and help to keep opt-outs low.
It would also help make further increases to the total contribution affordable to the lowest paid.
Prospect supports the idea of a new Pension Commission to build a consensus between leaders in business, trade unions and political parties on how to tackle pension adequacy and build on the success of auto-enrolment.
This commission should comprehensively review the structural problems in saving for retirement and look at recommending long-term policy to address these problems.
The conclusions should include recommendations on how to improve saving for retirement among the growing numbers of self-employed workers in Britain.
Pension provision is inherently long-term and therefore requires long-term policy making that spans successive governments.
To achieve more progress in this area, the same consensus needs to be built that achieved the success of auto-enrolment.