Giant tortoise. Photo: Africanway
Government inertia could put pensions auto-enrolment at risk
Cleverly harnessing individual inertia to help workers get a workplace pension has been behind the success of automatic enrolment. But government inertia could put its early success at risk.
Under automatic enrolment, workers have to actively opt out of membership (soft compulsion) while employers have to make contributions into their pension pots (hard compulsion).
The results are impressive. Since 2012, and after decades of falling pension participation, it has brought seven million people into workplace pensions. Opt-out levels are far below expectations, especially among young workers.
In 2016, 68 per cent of employees belonged to a workplace pension scheme. This is the highest percentage since at least 1997.
But there are two key problems:
- Contribution rates are not nearly high enough to provide a decent pension in retirement.
- Too many workers are still excluded, in particular women.
The future of workplace pensions is being considered by the government’s automatic enrolment review this year.
In the TUC’s recent submission we focused on two areas:
Automatic enrolment has proven to be very successful in bringing into the pensions system those – primarily men – in full-time employed work.
But there is a great deal of evidence that overlapping groups including part-time workers, women, and those from ethnic minorities are excluded from the system.
They therefore miss out on an element of pay – deferred pay – that their colleagues receive.
There is a particular problem caused by the earnings trigger. Our research has found that of the 26.4 million employees in the UK, 4.6 million (or 17.6 per cent) earn less than the minimum earnings of £10,000 from a single job that triggers auto-enrolment. Of these, three quarters are women. Indeed, more than a quarter of female employees earn less than the auto-enrolment trigger.
The trigger has a particularly unfair impact on those 106,000 workers, (70 per cent of them women) who hold multiple jobs which combined would take them over the £10,000 threshold.
Minimum contribution rates are currently just one per cent from the worker and one per cent from the employer. Due to a prolonged, and delayed, timetable, total contributions will gradually rise to eight per cent in 2019.
This would still leave the median earner with a less than 50 per cent chance of achieving a decent standard of living in retirement.
Yet, in much of the private sector these minimum rates are the norm. Some 42 per cent of private sector employees contribute less than two per cent of earnings into a pension. More than half (52 per cent) of their employers put in less than four per cent.
Further muddying the picture is the system for assessing contributions. This is complicated for employers to administer and substantially reduces the contributions being paid from the headline rate.
Under current rules, the first £5,824 of an employee’s earnings does not count for the purposes of auto enrolment and anything above £43,000 is not included either.
So for someone on £10,000 a year, only £4,176 of their earnings are pensionable, and for them, eight per cent of qualifying earnings actually means just 3.4 per cent of their total salary is being contributed. Part-time workers with more than one job are particularly affected because the qualifying earnings deduction applies to each job.
It is also worth noting that any decision to reduce how quickly the state pension rises by abolishing the triple lock, one of the recent proposals made by John Cridland’s Independent review of state pension age, will put even more pressure on workplace pensions to deliver a decent income in retirement. Contrary to the perception of many, young workers are likely to be more reliant on the state pension than those retiring today.
This is what needs to happen:
- In the short-term the system of contributions should be simplified and expanded via the abolition of the system of qualifying earnings.
- Employer contributions should be made from the first pound of earnings.
- We need to establish a route map to raising minimum contributions so that those saving know they have a good chance of a decent income in retirement. This has been the approach in Australia for example.