The UK's workplace pension auto-enrolment system, introduced in 2012, has significantly changed the concept of saving for retirement for many working people. Instead of having to ask employers to join their pension scheme or ignoring saving for retirement entirely, eligible employees – whether working full or part-time – are now automatically enrolled in their employer’s workplace pension scheme.
Since it was introduced in 2012, auto-enrolment has significantly changed the concept of saving for retirement for many working people. As a direct result of being automatically enrolled in their employer’s workplace pension scheme, many more people are putting money aside for their retirement. The figures speak for themselves: according to DWP estimates, in 2012 the participation rate for eligible employees in workforce pensions was 56%, by 2023 it was 88%.
While this is clearly a good outcome and proves the effectiveness of auto-enrolment in encouraging people to save for their retirement, there are several concerns about whether this approach is enough to secure a comfortable retirement for everyone.
The current state of auto-enrolment
Despite the progress, there are widely discussed concerns that the current contribution rates of 8% of qualifying earnings (with at least 3% coming from the employer) are not sufficient to guarantee even a moderate standard of living in retirement. Many employees are contributing at the minimum 5% level by default. However, there’s growing concern that, for many people, the minimum auto-enrolment contribution rates will not provide the income needed for a comfortable retirement. To achieve the Pensions and Lifetime Savings Association’s moderate living standard, an individual would need a pension pot of £300,000 to £500,000 to generate the required £31,300 annual income. The Office for National Statistics puts the median value of a pension not yet in payment for people aged 55 to 64 at £107,300.
These figures highlight the gap between how much many people are saving, and the amount necessary for a secure retirement.
Changes to enhance auto-enrolment
Several changes have been suggested to improve pension saving:
- Lowering the age threshold: Reducing the automatic enrolment lower age limit for eligible workers from 22 to 18 years old would help workers accumulate more savings over their careers. The compounding effect of saving earlier would potentially create a larger pension pot by retirement age. According to research by Phoenix Group and WPI Economics, increasing the minimum contribution to 12% could add £95,530 to a pensions pot if started at the age of 18. Currently, younger savers can request to be enrolled in the workplace pension scheme, but it doesn’t happen automatically.
- Abolishing the lower earnings limit: Currently, only earnings of £10,000 and above are pensionable. Removing this limit so that all earnings from the first £1 are included in pension contributions would particularly benefit low-income workers who would see an increase in their retirement savings.
- Tweaking the earnings trigger: The earnings trigger, currently set at £10,000, could also be adjusted to bring more individuals into the pension system and ensure a larger portion of the workforce is saving for retirement.
- Supporting low-income workers: Additional support could be provided to low-income workers who may struggle to save enough for retirement. Ensuring these individuals have access to adequate retirement savings options is crucial for addressing income disparities in retirement.
- Expanding coverage: Pension participation rates among some groups, notably the self-employed, remain too low. Expanding auto-enrolment coverage to include more workers, including the self-employed, would ensure broader participation in pension schemes, helping to close the gap in retirement savings and improve financial security across the population.
The first two amendments were included in The Pensions (Extension of Automatic Enrolment) (No. 2) Bill. The Private Members’ Bill, introduced in the House of Commons by Jonathan Gullis MP and taken through the House of Lords by Baroness Altmann, received Royal Assent in September 2023. However, it is yet to be enacted in legislation.
When asked recently about proposed changes to auto-enrolment in the House of Lords, Baroness Sherlock, Parliamentary Under-Secretary of State in the Department for Work and Pensions, replied that she could not comment on speculation about something that might be recommended in phase 2 of the pension review. Recent media speculation has suggested that this phase of the review, which is due to focus on pension adequacy, has been delayed indefinitely due to concerns over exposing businesses to further costs following the increases to minimum wage and employer NI announced in the Budget. Baroness Sherlock confirmed in the House of Lords that phase 2 would go ahead as planned, with the scope announced in due course, but she refrained from committing to a specific timeframe.
Auto-enrolment has made significant strides in increasing pension participation rates and ensuring more people save for retirement. However, more than ten years on from the introduction of auto-enrolment, concerns remain about the adequacy of retirement income produced under the current system. By lowering the age threshold, removing earnings limits, reviewing contribution triggers, supporting low-income workers, and expanding coverage, the UK government would enhance the effectiveness of auto-enrolment and help more individuals achieve a comfortable lifestyle in retirement.
There’s no question that many people need to save more and save earlier. Ensuring the auto-enrolment system evolves will be key to helping secure financial stability for future retirees.
This article first appeared on IFA Magazine on March 10, 2025. You can view the article here.
Posted in: Wealth Management Administration
