10 years of auto-enrolment: 5 reforms that could boost pension savings even further

A decade ago, auto-enrolment began to gradually roll out. Through auto-enrolment, the government aimed to boost pension savings and encourage workers to think about their retirement income sooner. The last 10 years have proven that auto-enrolment has been successful.

According to the Institute for Fiscal Studies, 90% of eligible workers in the private sector were saving into a pension in 2020. This compares to just 2 out of 5 private-sector workers participating in their workplace pension in 2012.

Auto-enrolment achieved this success because of two key factors:

  1. Employees have to opt out, rather than opt in. As all eligible employees are automatically enrolled into a workplace pension, it means those who were not saving into a pension due to apathy or a lack of knowledge now are.
  2. Employers must also contribute to a pension on the behalf of eligible employees. This not only provides a boost to pension savings, but can encourage more people to remain part of their pension scheme to benefit from “free money”.

Beginning with the largest firms, employees were automatically enrolled into a pension from 1 January 2012, with every eligible employee auto-enrolled by 1 January 2017. It means that most workers have now been saving for retirement for at least five years.

5 reforms that could boost auto-enrolment

There will be a review in the mid-2020s, but some people are calling for changes to be made sooner to engage even more workers with their pension. Among the suggested changes are:

1. Lowering the age workers are eligible

Under the current rules, employees must be aged 22 or over to be automatically enrolled. While some firms do offer pensions to younger workers, they don’t have to. It means thousands of youngsters are entering the workforce and not saving for retirement.

Think tank Onward’s research found that employees aged between 16 and 21 are fives times less likely to have a workplace pension than a middle-aged employee. While these workers are young, paying into a pension sooner rather than later means savings have longer to grow and can help the next generation form positive money habits. The think tank says reducing the age for auto-enrolment to 18 could boost total pensions savings by as much as £2.77 trillion.

Similarly, employers do not have to provide a pension for workers over the State Pension Age. For those who plan to work beyond this point, it could mean missing out on valuable savings.

2. Reducing the wage threshold to be eligible

To be eligible for auto-enrolment, workers must earn more than £10,000 a year. As a result, many part-time workers are not paying into a pension. This threshold could affect a variety of people, such as those balancing work with education or providing care.

Reducing the threshold would enable part-time workers to pay into a pension that their employer also contributes to on their behalf. At the moment, Onward’s figures suggest that fewer than 6 in 10 part-time workers are paying into a pension.

3. Increasing the minimum contribution

The minimum contribution both employees and employers must make to a workplace pension has already increased since auto-enrolment began, but there are calls for it to be increased further.

As of 2022, the minimum contribution is 5% of pensionable earnings for employees and 3% of pensionable earnings for employers. So, in total, 8% is added to an eligible employee’s pension, with tax relief and potential investment returns boosting this further. Employees may increase how much they pay into their pension and some employers offer increased contributions as a benefit.

While more people saving into a pension is a good thing, there’s a danger that people paying the minimum contribution will expect their pension to provide a comfortable lifestyle throughout retirement. For many, this will not be the case unless they take additional steps to secure their financial future. Some retirees could find their retirement income falls short of expectations. So, some have urged the government to set out further increases to contribution levels.

4. Increasing support for self-employed workers

According to the Office for National Statistics, there are more than 4 million self-employed workers across the UK.

Self-employed workers do not have to set up a workplace pension for themselves. According to Which?, almost 7 in 10 self-employed people do not contribute to a pension. A change to encourage more self-employed workers to set up a pension and increase awareness of why it’s important could help improve their retirement.

While a self-employed worker wouldn’t benefit from employer contributions when paying into a pension, they can still receive tax relief and their contributions will usually be invested.

5. Improving pension engagement

While the number of people paying into a pension has increased, many still aren’t engaging with their pension.

According to Hargreaves Lansdown, only 1 in 3 people who haven’t retired yet know what their pensions are worth. As pensions are usually invested, understanding potential returns is crucial for calculating if your pension is likely to deliver the retirement you want. Despite this, 34% of people with a pension don’t know whether it’s invested in a stock market, and many more aren’t sure how their savings are invested.

Reforms to promote a better understanding of pensions, such as requiring employers to explain what options an employee has, could help people get more out of their savings.

If you have any questions about your workplace pension or other assets and what they mean for your retirement, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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