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Auto-enrolment success as pension savings up £2.5bn a year

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Written by: Paloma Kubiak
17/11/2016
Auto-enrolment has boosted pension membership to 88% and savings have increased to the tune of £2.5bn a year, new research suggests.

According to the Institute for Fiscal Studies (IFS) research into contributions to workplace pensions, before auto-enrolment, only about half of employees were members of a workplace pension and membership had been falling over time.

But between April 2011 and April 2015, membership has been boosted to 88% and savings into pensions increased by £2.5bn a year. The IFS said this amount is “highly likely to increase significantly” over the next few years as more employers are brought into the scope of the scheme and because minimum contributions will increase from 2% to 8% of qualifying earnings.

The IFS said that in 2012 there were about 5.4 million private sector employees who were a member of a workplace pension. By 2015 this had increased to 10 million. Of this 4.6 million, it estimates about 4.4 million were the result of auto-enrolment.

It found the biggest boost to the numbers came from those aged 22-29 earning between £10,000 and £17,000 per year who had been with their employer for less than a year.

However most of those brought into the scheme have low levels of contributions. The minimum contributions to pensions under auto-enrolment is 2% of earnings between £5,824 and £42,385 (in 2015–16), with at least 1% from the employer.

Not everyone is eligible for auto-enrolment though – employees aged under 22 and over the state pension age, those earning less than £10,000 per year, and those who just joined their employer.

Despite this, IFS said auto-enrolment has more than doubled membership of workplace pensions among this group.

‘So far so good’

Jonathan Cribb, a senior research economist at the IFS and an author of the report, said the story of auto-enrolment is certainly a case of so far so good.

“A key issue is whether those brought into workplace pensions at low contribution rates will remain in when minimum contribution rates start rising.”

For Tom McPhail, head of retirement policy at Hargreaves Lansdown, auto-enrolment is proving to be one of the most successful policy interventions of the 21st century. However he said there is still much more work to be done.

“If we don’t keep moving forwards with the reforms, there is a risk that much of this initial good work could yet be wasted.”

He noted that while opt-out rates are lower than anticipated, big challenges lie ahead: “Opt-outs tend to be higher among smaller employers, many of whom are yet to go through auto-enrolment and critically, the contribution rates are still very low.”

Another area it needs to address is the excessively high contribution thresholds: “Too many low paid and part-time workers, many of them female are missing out due to excessively high thresholds. Over six million employees have already missed out on auto-enrolment and it should be reduced to the same level as the new state pension (£8,090 a year).”

Lastly, auto-enrolment doesn’t benefit the five million self-employed UK workers so McPhail said the government should look at introducing a solution to help them, based on the tax system.

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