We all know that most people aren’t saving enough for retirement. It’s a difficult fact, particularly in a political climate defined by the cost of living crisis. Last week DWP released research that shows fewer than 24% of private sector employees contribute 6.5% or more of their gross pay into their workplace pension. This number has failed to increase significantly since 2018, despite increases to the total minimum contribution rate up to 8%. We know that for many savers this is nowhere near enough to secure an adequate retirement, so there is a clear need for a government roadmap to get people saving more into pensions.
While we don’t have to see contributions rise this year, a concrete plan of how the next phase of Automatic Enrolment (AE) is going to roll out is urgently needed. This is essential so both workers and businesses know exactly how much they’re going to need to start paying in, and when.
This year marks the tenth anniversary of AE starting in earnest so there couldn’t be a better time to reflect on the successes to date and look ahead to how we solve the challenges that remain. In the five years since DWP published its AE review recommendations, very little has happened to address the flaws that were highlighted in the workplace pensions system. Our report, ‘Automatic Enrolment: What Will The Next Decade Bring?’ looks to bridge the gap between today’s uncertainty and where AE needs to go next.
For me, writing this report was a journey back in time. I was nine years old when the green paper establishing the pensions commission was published, so it was fascinating to go through the archive - literally, given that the commission’s report is no longer available on DWP’s website. As a student of politics, I also found it fascinating to hear our members reflections on the success of pensions policy making, as well as taking part in some blue sky thinking about how things could look in a decade’s time.
Our report calls on the Government to set out how pension contributions should be increased and the eligibility criteria widened to encourage people to save more over the next 10 years. Specifically, we recommend gradually increasing the minimum contribution rates from 8% to 12% over the next 10 years, with the new minimum contribution split evenly between employers and employees.
Our report highlights the enduring ethnicity and gender gaps in pension saving which is also evident in the most recent figures from DWP. The data shows a huge gap between White eligible private sector employees participating in pension saving (86%) and Pakistani & Bangladeshi (66%) and Indian (71%) employees participating. The statistics on gender paint a similarly bleak view. While more women, as a percentage of private sector eligible employees, participate in pension saving, there are 2.5 million more men than women saving into pensions. Clearly then there is a problem with women being paid less than the £10,000 AE earnings trigger or missing out on pension saving due to moving to part time work or leaving work altogether. Among women in the private sector who are eligible for AE and participate, it’s notable that the average employee contribution is £1,500 a year (compared to £2,010 for men), so it’s no wonder we are seeing vastly unequal outcomes in retirement.
We are also urging the Government to bring forward the commitments it has already made to extending automatic enrolment, by lowering the age threshold from 22 to 18, and reducing the earnings threshold so that contributions are made from the first pound earned. These are slated for the mid-2020s so need to be legislated for as a matter of urgency if this timeline is to remain realistic.
Given it has now been almost two decades since the last pension commission, at our recent event ‘How much is enough and who’s missing out?’ one audience member was keen to hear Sir Stephen Timm’s thoughts about whether now is the right time to assemble a new one. Sir Stephen shared our reluctance to revive the commission on the grounds that we already know what needs to happen, we just need to get on with implementing it. But his suggestion of an Office for Pensions Responsibility, along the lines of the ONS model, was an interesting one. This could certainly be useful for keeping governments to their committed policy aims such as the 2017 AE review recommendations.
AE has been hugely successful in increasing the number of people saving into a pension, but this was only possible because of the level of cross-party support. This must continue so that we can secure a definitive plan based on the growing industry consensus, particularly for increasing pension contributions. A concrete roadmap is needed, so that workers, businesses, and the pensions industry have a long enough lead in time to replicate the success of the first ten years of AE for the next decade.