Auto Enrolment faces the next challenge - reaching nearly 5 million self-employed

20 December 2016

Comment from Adrian Boulding, Head of Retirement Strategy at Dunstan Thomas

Last week saw the publication of the 56-page Automatic Enrolment Evaluation Report 2016, published by the Department of Work & Pensions (DWP). It offers an at times glowing review of the continued success of Auto-Enrolment (AE) as low opt-out rates continue to exceed expectations and AE scheme coffers gently swell.

To date 6.87m workers employed in 293,868 firms have auto-enrolled, up 1.77m in the last 18-months. Such is AE’s success that 75% of eligible workers now have pension provision. That means that £81.8bn is now held in all public and private sector pensions savings, up 8% - adding £7bn to total savings since AE got underway in 2012. NEST even threw a party to celebrate their first £1bn.

Defined Contribution workplace coffers are swelling nicely, assisted also by generally increasing contribution levels – up from 7% of total earnings in April 2012 to 8.1% median contribution this year.

Furthermore, there’s no strong evidence of the ‘levelling down’ of contributions that many expected to happen as employers planned the funding of pension contribution increases associated with AE. Indeed, the report indicates only 4% of employers intended to drop overall pension contribution percentages to help pay for the larger pension bill flowing from AE. Let’s hope they remain true to their word as contribution levels ratchet up!

Better still is the news, supported by regression analysis tables on page 41, that younger and lowest quartile earners have benefitted most from AE. Workplace pension membership amongst private sector-employed 22-29 year olds, has apparently increased by 52%, whilst pension membership amongst lowest quarter earners increased by 54% since 2012. There are even 28.1% more AE-ineligible workers (those earning less than £10,000 per year) that now have some pension provision, while 20.3% of employees with less than three months’ service with their current employer now have pension provision. It’s not clear why we are seeing this spillover effect, but it’s most welcome.

For those who take a slightly longer view, it does not look quite so rosy however. Total saving in private sector pensions in 2015 was still below the total pot that had accumulated 10 years before, so today there is £43.6bn held by private sector pension schemes – when back in 2005 there was £44.7bn. So, echoes of the lost decade extolled by Mark Carney earlier this month come out here as well. It is also easy to gloss over the simultaneous slide in gold-plated DB scheme access which is fast becoming a thing of the past for all but public sector employees it seems.

But the point surely is that AE arrested and has now reversed an otherwise dramatic slide of accumulated personal pension assets. It fell to £37.3bn, by 16.6% in the six years to 2011 just before AE went live. To top it all, persistency levels have been gently rising, to 79% in 2015, up from 76% in 2010. So disaster averted and the best is yet to come as AE combined employer-employee contribution levels rise, first to 5% from April 2018 and finally to 8% by April 2019.

Looking ahead in next year’s review, it is clear that the focus now needs to go on the ones left out of the AE revolution. First and foremost amongst these is the growing ranks of the self-employed. How can they be helped to save for their retirement? It’s a problem that must be addressed because the numbers running their own show are rising inexorably, increasing from 3.8m in 2008 to 4.6m in 2015, according to Office of National Statistics’ latest numbers.

One option is to opt-in self-employed people via a 4% higher National Insurance Contribution (NIC) which they need to pay. To make this more palatable, that 4% NIC surcharge could be supplemented by a 2% AE pension contribution from the Government. If they choose to opt-out they go back to the standard NIC but get no pension. Self-employed people could then either choose a pension provider for the money to be sent to, or have funds allocated on a random carousel basis just like Child Trust Fund accounts used to. The trick is to incentivise opting in and once the savings habit is firmly established, persistency naturally rises as inertia takes hold.

Once this group has been welcomed into AE, where next? We can then look ahead to other vulnerable groups such as unpaid carers, volunteer charity workers - people that are silently giving a great deal of themselves, and in the process unburdening the State.

The DWP is also seeking to reach employees with multiple jobs who do not therefore meet the earnings criteria for AE anywhere. Again, this is a growing group of people operating on zero hours contracts, sometimes being paid below the living wage and often working several jobs to make ends meet. Today, they have the first £5,824 of earnings disregarded for pension contributions in each job, and that’s patently unfair on anyone with two or three jobs!

I’m hearing whispers of a favoured solution to this being to leave the qualifying earnings framework in place for employee contributions, but to make employers contribute on all earnings, from the first pound upwards. That would be neat.

It is difficult to get reliable numbers on how large this group is but there could easily be several million people here not being brought into saving for retirement. Will we be able to get the benefits of AE to this more vulnerable group or will they have to rely totally on their state pension? AE remains a work in progress. But the first 5 years can definitely be described as a success and for the next five years we need to maintain momentum for those already in and to extend the reach of AE to bring even more people into the safety that long term savings provide..

Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas

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