Pension auto enrolment – the end of the beginning?
By most measures, the strategy of automatically enrolling eligible employees into a company sponsored pension scheme is regarded as a success. Before auto enrolment, employees had to ‘opt in’ to work based pensions but now the principle is that employees must make a conscious decision to ‘opt out’.
A Department of Work and Pensions (DWP) report from December 2018 confirmed that the number of eligible employees participating in a workplace pension increased to 17.7m (84%) in 2017 from 10.7m (55%) in 2012 and that the total saved in 2017 was £90.3bn.
This annual savings amount is set to increase further because, from 6 April 2019, the minimum contribution increased to 8% per annum; 3% from the employer and 5% from the employee. This increase brings contributions to the target level set when automatic enrolment started back in April 2012. Contributions started at 2% (1% employer and 1% employee), increased to 5% (2% + 3%) from 6 April 2018 and now from 6 April 2019 are 8%.
If this most recent increase has the same effect on participation rates as the last rise in April 2018, the above numbers will remain largely unchanged and employees in the UK will be making a far higher provision for retirement than in previous years.
So, job done? Mission accomplished? The beginning of the end or the end of the beginning?
The same DWP report seems to indicate the former, as it refers to future evaluations being against the ‘steady state’ position.
In my opinion, any such complacency would mean that we miss a fantastic opportunity to help workers in the UK take the next steps in understanding their pensions. So far, auto enrolment has been largely imposed on employees, and, the default position of inclusion means that a (high?) proportion will still not understand what they are contributing to. The key question then is how best to change this situation?
There are several parties who can make a difference – employers, pension providers, financial planners and regulatory authorities, not to mention the employees themselves who must be expected to take some personal responsibility.
In my view, the answer must surely be education, ideally starting in schools. Employees of the future would understand the importance of long term savings to help them take control of their own future. The Personal Finance Society ‘Discover Fortunes’ programme is a great start but cannot reach nearly enough children. Adding personal finances to the basic school curriculum is the only way to start to make a real difference.
In the meantime, in my opinion, education falls to a combination of enlightened employers, who will understand the benefit of a happy, secure and educated workforce, pension providers who can improve access to information through technology, and financial planners, who under current regulations are the only people who can actually give advice.
At Thorntons Investments we are committed to holding up our end of the deal. Please contact us if you have any questions about your pensions or any other area of your finances.
The views expressed are those of Thorntons Investments. The contents of the article are solely for information purposes and are not intended as advice.