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The case for extending auto-enrolment

by jcp

By: Pete Hykin, Co-founder, Penfold

Auto-enrolment may be the most significant initiative launched within the pensions industry, but nearly a decade on from its introduction it’s clear that the industry is still not doing enough to get people saving for retirement. On top of that, some workers fail to qualify to be automatically enrolled, whether that’s due to earnings or age, meaning there are many people across the UK who are not benefitting from this initiative. So, as an industry, it’s time to consider extending the scheme to help these individuals better prepare for later life.

Fortunately, at the start of 2022 we saw a new bill brought to Parliament to extend auto-enrolment to more workers, but what other steps should the industry and government taketoimprove the retirement prospects for millions more workers?

Creating a new cohort of savers

There are many employees who continue to miss out on the benefits of a workplace pension, simply because they are either too young or do not earn enough. That doesn’t seem fair.

Currently, only employees aged 22 and over can join a workplace pension scheme through auto-enrolment. Yet, there are thousands of workers across the UK whochoose to start their careers at the age of 18 and this is increasingly popular given the higher cost of university tuition.Including these individuals in auto-enrolment could bring significant benefits.

For businesses, lowering the minimum age of enrolment could provide a great opportunity. Particularly because, in the aftermath of the pandemic, employees are now valuing meaningful benefits, such as pensions and health insurance, far more than bean bags or Friday beers, so extending auto-enrolment could be a useful tool to entice skilled younger workers tostart careers earlier. Engaging workers as soon as they enter the job market would give them a better opportunity to benefit from the returns they will accumulate over the years. For someone aged 18 years old, the effects of compound interest as they save into a workplace pension until they retirewill be more significant than if they are only able to start saving four years later.

Auto-enrolment should also be extended to lower paid and part-time workers.It’s arguably these groups that need access to a workplace pension scheme more than anyone else, to ensure they have every opportunity to build a stable income for retirement.

A better deal for all

However, while extending auto-enrolment is important, if we really want to see a step change in people’s preparedness for life after work, this also means increasing pension contributions.

Saving the right amount is essential to make sure that people have the best chance of funding the retirement they’ve worked hard for. Yet, the lack of knowledge among the general population of how much is actually needed to retire comfortably means many people opt for the minimum contribution amounts. More education is needed to equip the working population with the information they need to make good choices. Getting the government to clarify what the right amount of total earnings are at each stage of your life would be helpful.

Other ideas like a mid-life pension MOT have been debated and we fully support any efforts by the industry or government to get people doing the calculations around what they’ll need to afford the lifestyle they imagine.

We’d also like to see more initiatives from the DWP that reward businesses who prioritise engaging employees with their pension. Similar tax efficiency schemes to salary sacrifice would be a welcomed development for businesses who need an extra nudge towards providing a standout pension scheme for their employees.

A focus on education

Whichever routes the government takes to improve auto-enrolment, the impact of these measures is likely to take time to come into effect, so we must all consider other ways we can help employees to save for the future.

First and foremost, there needs to be moreeducation on the importance of retirement savingand budgeting. This includes savers understanding pensions in the context of their wider finances, finding out what their retirement goals are and what they need to do to achieve these goals, whilst still being able to manage their day-to-day spending.

The industry should be doing much more toraise awareness about other ways to complement your workplace pension either by setting up a private pension or exploring whether it makes sense to combine previous pensions into one pot.

Auto-enrolment is one of the pensions industries most significant achievements with more than 10 million people now saving into a workplace pension. Now is the time we must all consider how we can improve this important initiative and ensure that millions more people have every opportunity to save for their future.

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