Auto enrolment analysis: success so far but major challenges still lie ahead
The Institute for Fiscal Studies has published an analysis today of auto-enrolment, you can access the report here.
Their research shows that auto-enrolment has boosted pension saving by £2.5 billion and increased participation in pensions to 88% of those eligible under auto-enrolment.
Within the next few weeks the DWP will publish its terms of reference for the 2017 review of auto-enrolment.
Tom McPhail, Head of retirement policy:
"Auto-enrolment is proving to be one of the most successful policy interventions of the 21st century so far. It has already increased the number of people saving for retirement by 6.7 million and is projected to eventually boost annual savings by £15 billion a year; this is powerful stuff. However there is still a huge amount more to be done and next year’s review by the DWP will set the agenda for the next phase. 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."
So far the number of people opting out of auto-enrolment has been far lower than originally anticipated, at under 10% of members. However the big challenges still 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. It isn’t yet known whether opt-outs will increase as the contribution rates increase. For this reason we think the decision on how and when to develop the next phase of contribution increases shouldn’t start until we have evidence on which to build policy decisions. This means deferring this question until 2019 and beyond.
Engagement is still a low priority for many schemes but this has to change. Pension freedoms demand that scheme members make decisions about their own retirement.
Scheme members should be free to choose their own auto-enrolment scheme if they want to, with an employer selected default for those that don’t. This is an essential step in giving individuals ownership of their own retirement savings.
Too many low paid and part-time workers, many of them female are missing out due to excessively high thresholds. Over 6 million employees have already missed out on auto-enrolment. The eligibility threshold should be reduced to the same level as the new state pension (£8,090 a year) from its current limit of £10,000 and all earnings up to the upper limit of £43,000 should be included; at present the first £5,824 of income can be ignored for pension contribution purposes, something which is deeply unfair to the lower paid.
There are nearly 5 million self-employed workers in the UK who get no benefit from auto-enrolment. The government should look at introducing a solution to help them, based on the tax system.