More than a decade after its introduction, auto-enrolment has transformed pension savings — but many workers still face a significant shortfall in retirement income. With contribution rates, age thresholds, and earnings limits under scrutiny, now is the time for financial advisers to help shape the next phase of reform and guide clients towards long-term financial security, says David Simpson, Head of EMEA, GBST, in the following insight for IFA Magazine.
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 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, several concerns remain about whether this approach is enough to secure a comfortable retirement for everyone.
The current state of auto-enrolment
Despite the progress, many argue that the current contribution rates of 8% of qualifying earnings (with at least 3% coming from the employer) are insufficient to guarantee even a moderate standard of living in 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 the amount many people are saving, and what’s necessary for a secure retirement.
Changes to enhance auto-enrolment
Several changes could improve pension saving:
- Increasing the contribution rate: Raising the rate from 8% would help people save more for retirement, although it could make the pension less affordable for those on low incomes. The ABI has previously suggested gradually increasing the rate to 12%, with the employer and employee both paying 6%, but including the option to reduce this rate if affordability is a problem. The proposed flexibility would encourage greater savings while removing the ‘all or nothing’ issue of the current approach so more people stay enrolled.
- 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 could 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, employers only have to contribute to the pensions of employees who earn more than £6,240 per year. Removing this limit so that all earnings from the first £1 are included in pension contributions would particularly benefit low-income and part-time workers who would see an increase in their retirement savings.
- Tweaking the earnings trigger: The earnings trigger, which is the amount an employee must earn to be automatically enrolled, could also be lowered from the current threshold of £10,000 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.
Points two and three were included in The Pensions (Extension of Automatic Enrolment) (No. 2) Bill. Although the Bill received Royal Assent in September 2023, it is yet to be enacted in legislation. In fact, the government confirmed in January that the thresholds and trigger would remain unchanged for the 2025/26 tax year.
When asked late last year 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. Media speculation had suggested that this phase of the review, due to focus on pension adequacy, would be delayed indefinitely due to concerns over exposing businesses to further costs following the increases to minimum wage and employer NI announced in the Budget. However, Baroness Sherlock confirmed it would go ahead as planned, with the scope announced in due course – although she didn’t commit to a specific timeframe.
There’s no question that auto-enrolment has changed how people save, but more than ten years on, many pension pots still won’t generate enough income for a good standard of living in retirement. The next phase of reform can’t wait. By lowering the age threshold, removing earning limits, and expanding coverage, we can ensure every worker has a fair shot at a comfortable retirement.
We invite employers, policymakers, and financial services providers to champion these steps – whether through active support of legislation or refining their contribution structures. The more closely we collaborate, the better our chances of delivering genuine financial security for every future retiree.
