Automatic-enrolment has been a great success, with 9.5 million new pension savers enrolled since its introduction, according to the Automatic-enrolment declaration of compliance report: July 2012-end March 2018, published by The Pensions Regulator (TPR). Nevertheless, there is more work to do. There are more people saving for later life than ever before, but many are saving too little to achieve an adequate retirement income. Currently, only 3% of defined contribution (DC) pension savers are on track to achieve the Pension Commission’s target replacement rate, according to the Retirement income adequacy: generation by generation report, published in 2016 by the Pensions and Lifetime Savings Association (PLSA).
It is for this reason that the PLSA has proposed an increase in automatic-enrolment contributions from 8% of salary to 12% throughout the 2020s. Of course, any rise in contributions needs to take account of the lessons learned from the government’s current process of increasing minimum contributions, known as phasing. If increasing contributions proves unaffordable for savers, we could see people opting out of automatic-enrolment and not saving into a pension at all.
One way of softening the impact of higher contributions on savers would be to ask employers to pay a higher proportion of the total. Evidence from the Show me the money: the behavioural science of reward report, published by the Chartered Institute for Personnel and Development (CIPD) in 2015, has shown that matching employer pension contributions encourages employee participation. Today, the automatic-enrolment regime requires employers to pay 37.5% of contributions, though we know from the government’s 2017 Automatic-enrolment review report that 64% of employees received an employer contribution in 2016 that was higher than the minimum requirement. This suggests that employers are taking their employees’ retirement savings seriously.
Our view is that any future increase in contributions should be set out by the government at least five years in advance in order to give employers sufficient time to adapt to the changes. This is more than most employers claim they need. According to PLSA research conducted in 2017, nine in 10 employers believe that phasing contributions over three years or more would help make it affordable for them.
Automatic-enrolment has made financial security in retirement a very real prospect for millions of people. Employers can help to make this ambition a reality by offering their employees matching pension contributions as standard.
Nigel Peaple is deputy director DC, lifetime savings and research at the Pensions and Lifetime Savings Association