October will mark 10 years since the introduction of automatic enrollment (AE) in 2012, and it’s clear the policy has had many positive impacts on retirement savings.
This milestone provides an opportunity to reflect on AE’s successes, while considering areas where more could be done to better support the positive outcomes of retirement.
Increase in participation in pension plans
In June 2022, 10.7 million employees were automatically enrolled and 974,000 automatically re-enrolled, having previously unenrolled.
Despite fears of an increase in opt-out rates, they remained broadly stable.
Prior to the introduction of EI, the Department for Work & Pensions (DWP) impact assessment predicted around one in three people would retire.
There needs to be consensus on how best to leverage auto-enrollment success
As EI was gradually rolled out, there was concern that opt-out rates would increase, either once small employers reached their staggering dates or as minimum contribution levels would increase.
However, during EI’s first decade, non-participation rates were at levels consistently below expectations – about one in 10 – throughout the staging and premium increases, as well as during the peak of the Covid-19 pandemic (some plans reported a slight increase in short-term breakage in 2020, but this then stabilized at lower levels).
Impact of EA on the private sector
AE has increased participation in occupational pension schemes, particularly in the private sector. In 2012, only 46.5% of employees participated in a company pension plan. By 2021, participation had risen to 79.4%.
Meanwhile, the gap between participation in the public and private sectors has also narrowed.
Participation in the public sector has increased from a relatively high base of 83% in 2012 to 91% in 2021, while participation in the private sector has increased from 32% to 75% over the same period.
However, many are unable to access EI benefits.
Ineligible for EI
The number of employees deemed ineligible for EI increased at a faster rate than the number of employees deemed eligible. Characteristics associated with ineligibility or lower levels of eligibility include:
- Young savers: EI is currently limited to workers aged 22 to retirement age. Reducing the age of eligibility for EI from 22 to 18, as recommended by the 2017 Automatic Enrollment Review, could increase eligibility by about 2.8%.
- The self-employed: Numbering approximately 4.1 million people, this group is excluded from access to EI benefits because they do not have an employer who can enroll them and contribute on their behalf.
- Low-income people: EI eligibility currently requires earnings over £10,000 in a single job. Removing this threshold could increase eligibility by 9%.
- People with multiple jobs: Of the 10.5 million workers deemed ineligible, nearly 106,000 workers, 70% of whom are women, are not automatically enrolled because their income comes from more than one job.
Under-retired groups, including women, people of Black, Asian and minority backgrounds, caregivers and people with disabilities, are disproportionately likely to belong to one of the above groups and therefore not be eligible for EI.
Contribution levels too low
There are also concerns that current contribution levels are unlikely to deliver adequate retirement outcomes.
The 2017 review recommended reducing the lower income band for contributions to £0, so that employees and employers would pay contributions based on the first pound of income up to the top income band.
There are still many who cannot access the benefits of auto-enrollment
The DWP’s ambition is to implement this policy in the mid-2020s. If passed, this will increase savings levels for those whose employer contributes based on band earnings, and would have the greatest proportional impact on low-income people.
Now that all planned minimum contribution rate increases have been implemented, there have also been industry-wide recommendations that further increases be considered.
Although past increases have not resulted in substantial increases in refusals, any further increases must be weighed against the potential risk of encouraging higher refusal rates.
The Association of British Insurers (ABI) has called for default contribution rates to be increased to 12% from 2023, with an opt-up or opt-down mechanism, meaning savers can choose to contribute at a lower rate but must make an active decision to do so.
As we approach the 10th anniversary of EI, as well as the mid-2020s (the time when the government announced its intention to introduce the recommendations of the EI review), there needs to be consensus on the most effective way to build on the successes of the policy and increase its reach.
After all, part of AE’s success comes from consensus and cooperation between government, industry and employers.
Lauren Wilkinson is Senior Policy Researcher at the Pensions Policy Institute