Ten years on from the introduction of automatic enrolment, Director General of the ABI Hannah Gurga reflects on the significant impact that it’s had and the challenges that remain.
Our nation’s pensions are one of the greatest public policy achievements of recent times. A decade ago, the introduction of automatic enrolment made a workplace pension the norm. The futures of millions of Britons have since been made more secure, with pension pots now reaching £28bn as a result. Yet, for all this progress, the UK’s savers are still far from retirement ready. There is much left to do.
Auto-enrolment was a signal achievement. When the policy was introduced, fewer than half of us had a pension. Just a decade later, that number has soared. Today, nearly eight in ten of us do.
The policy was laudable not only for what it achieved, but how it was achieved. This was an initiative that crossed political divides. Developed by a Labour government, it was introduced by the Conservative and Liberal Democrat coalition, and has had cross-party backing across Parliament ever since. It also brought together the public and private sector, and retains the full support of employers and the pension industry.
While we have reason to be proud of what has been achieved in the past ten years, it is only the start. Today, savers across the UK are still far too disengaged from their own pensions. When the organisation I lead, the Association of British Insurers (ABI), polled 4,000 adults, over half told us they have no pension. However, eight in 10 eligible employees now have a workplace pension, which goes to show how important it is to raise awareness.
It is perhaps little surprise then that around 10 million people are saving too little. When auto-enrolment was introduced, it was intended to ensure people had at least half of an adequate pension income. The rest, it was hoped, would come from voluntary, personal savings. Those savings have not materialised.
It is therefore essential that action is taken now to secure people’s futures.
Within the next ten years, we want to see an increase in auto-enrolment pension contributions, with savers given the option to opt-up or opt-down from a new, but voluntary, higher rate.
We know from past experience that when nudged towards saving more, few opt-out of increasing contributions. When the contributions were last increased, the Department for Work and Pensions expected a third to opt-out. In reality, only one in ten did. With the coming years likely to be hard on people across the country, we believe that employers should raise their contributions first, starting in 2028.
We also want it to be easier for people to take control of their own future. This year, we launched a new campaign called #PensionAttention. It encourages people to locate the pensions they may already have and think about what they want their retirement to look like. It also directs them towards trustworthy sources of information and advice.
Those who are underserved by the current system also need help. A secure retirement should not be the preserve of those who are wealthier and in secure jobs. Over the past twenty years, the proportion of self-employed people with a pension has halved, now sitting at just 16%. Participation in auto-enrolment schemes, meanwhile, is far lower amongst women and people from ethnic minority backgrounds, who are more likely to have lower pay or work in multiple jobs.
We need to create easier ways for everyone to save. That could mean lowering the income threshold for auto-enrolment, which is currently £10,000 per year, or at least holding it steady as inflation and wages rise. It could mean making it easier for the self-employed to contribute to their pension, through their national insurance payments for instance. Or allowing them to invest or save in the manner they want, outside or alongside the traditional structure of automatic enrolment. Finally, it must mean ensuring that the incentives that promote saving remain in place, like the tax relief that encourages employers to contribute to their employee’s futures.
Albert Einstein is said to have quipped that the most powerful force in the universe is compound interest. While this may not have been in all seriousness, it tells an important truth. The more you save, and the earlier you save it, the more you will have in the future. £100 saved with 5% interest at the age of 20 increases to £900 by the time you are 65. Start saving ten years later, and the growth of your £100 is reduced, reaching just £550 by the time you retire.
A secure future isn’t only about the accumulation of money. The introduction of Pension Freedoms has made it possible for people to withdraw their pension earlier. While this is very popular with customers, offering welcome flexibility, in practice many people have withdrawn more than expected and earlier than expected, often under the pressure of increasingly squeezed day-to-day household budgets.
This should perhaps not surprise us. More than half of those accessing their pensions are doing so without any professional advice. It is welcome news that the Financial Conduct Authority is now reviewing the boundary between financial advice and guidance. Financial advisers have a key role to play in helping consumers get the best out of their retirement. But, as most people do not receive advice, it is important to explore how firms can go further to help people throughout their lives, from getting started investing to accessing their pensions.
Advice like this doesn’t only have the potential to change your own future. Recent research shows that where you choose to invest your pension could be 21 times more powerful in the fight against climate change than giving up flying, choosing renewable energy and going vegetarian combined.
As the cost-of-living rises, the months and years ahead of us will be hard for many people across the country. At a moment like this, there will be a temptation to deal with today’s problems at the expense of tomorrow’s. Instead, we must do the opposite.
Ten years ago, far-sighted legislation ensured millions more people put money away for their retirement. That was just the start. A large minority were not served by the introduction of auto-enrolment, like low-earners and the self-employed. And the money that many have put aside is still not sufficient.
Over the next ten years, we have an opportunity to make the UK retirement ready. We must take it.
This article first appeared in Pensions Age.