The success and 10-year anniversary of pensions auto-enrolment02 November 2022
Automatic enrolment – the legal requirement for an employer to enrol all eligible workers into a workplace pension and contribute to it – is one of the biggest changes we have seen in pensions legislation in recent times. The initiative has proved to be a great success with around 22.6 million now in a workplace pension in April 2021, although the fear is that many are simply not paying enough in, as you will see later in this blog. More statistics from the government can be found here: https://www.gov.uk/government/statistics/workplace-pension-participation-and-savings-trends-2009-to-2021
October 2022 will mark a decade since the first employees in the UK were automatically enrolled into workplace pension schemes. Large employers (with 250 or more workers) were required to start automatically enrolling their workers from October 2012, with other smaller organisations following in stages over subsequent years. Now, auto-enrolment rules apply to all employers, no matter how small.
To mark the 10-year anniversary of auto-enrolment, Royal London has produced a fascinating report (we appreciate that pensions are not the most exciting of topics, but nevertheless necessary) on the future of auto-enrolment, looking at the impact of workplace pension legislation to date and the ways in which successes may be built upon going forward.
We have highlighted a few key points below.
Impact on workplace pension participation
The impact that auto-enrolment has had on UK pension membership is profound. In 2012, around 55% of UK employees had a workplace pension. In 2021, this had risen to 88% (source: Department for Work & Pensions).
The Royal London report notes that auto-enrolment has had some of the greatest impact for those in the lowest-paid and least secure employment sectors. Between 2012 and 2021, workplace pension participation rates in the accommodation and food service sectors rose from 5% to 51%, and in the administrative and support service sectors from 14% to 64%.
Whilst the figures above are extremely encouraging, it is important to bear in mind that a significant number of employers and employees are contributing only the minimum amount required by law (8% gross pa in total of qualifying earnings – currently those earnings between £6,240 and £50,270 gross pa).
From an employee's point of view, this is in part a natural consequence of the default nature of automatic enrolment: as an employee is not required to take any active part in their enrolment, there may be less engagement with the pension plan and the level of contributions being made. The Royal London report notes that among workers with a workplace pension, 20% have never checked the value of their savings and a further 10% check less than once a year.
From the employer perspective, for many firms, there is a balance to be struck between providing attractive benefits to encourage recruitment and retention of good quality employees, and the costs of funding contributions above minimum levels.
Is saving through auto-enrolment enough for retirement?
For most people, saving only the statutory minimum contribution level into workplace pensions over a working lifetime would be insufficient to fund retirement. Royal London's research found that there is misplaced confidence amongst some sections of workers in the ability of their savings to provide a secure income for the duration of their retirement, particularly amongst those saving the least into workplace pensions.
Building up additional funds for retirement
Remaining in an auto-enrolment/workplace pension is invariably worthwhile, as long as it is affordable. If an individual opts out or leaves their workplace pension plan, they will not then benefit from the employer contribution, or from tax relief on their own contributions.
Workplace pension savings, whether at minimum levels or more significant, are certainly a helpful addition to the retirement portfolio. In many cases though, retirement income is likely to come from a range of sources, including pensions built up through work, along with private pensions, the State Pension, savings, property/rental income or investments as examples.
It's important to be actively engaged with your pension planning, and to check all your pension plans, and the level of savings you are making, on a regular basis. Complacency can be dangerous and seeking good independent advice early on the ways in which you save for retirement could make all the difference to your later years.
No individual advice is provided during the course of this blog.
Keith Churchouse FPFS
CFP Chartered FCSI
Chartered Financial Planner
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