Automatic success for the people?

Political commentators love a good high-profile policy disaster. Think NHS IT systems or the poll tax. But successes happen too. Usually they’re small scale, making incremental improvements, often for specific parts of the population. But just sometimes they’re a really big deal – fundamentally changing outcomes for millions of people. When such victories come along, we should celebrate them just as loudly as we bemoan the failures.

By highlighting the wins, we can push back against the unhelpful fatalism that can sometimes surround public policy problems. And importantly we can make sure we learn from what works. Equally, we must also caution against complacency; spending our time giving a pat on our collective back while failing to recognise the need to further improve policy, or missing that some parts of society continue to fall through the cracks.

Auto-enrolment is a good case in point. The policy stems from recommendations made over a decade ago by Adair Turner’s Pensions Commission, was initially legislated for by the last Labour government and then operationalised by the coalition government in 2012. The aim was to grapple with the difficult – and long-term – problem of declining pension saving.

This fall was driven by a shift in the workplace pensions on offer from employers. Defined benefit (DB) schemes (where pension entitlements are linked to final salary and years of service) were increasingly closed to new members, leaving, for many, only the option of less generous and less attractive option of a defined contribution (DC) pension (where employer and employee contributions over the working life determine the size of the pot built to fund retirement).

So has auto-enrolment fared so far? With the arrival this week of figures on workplace pension saving in 2016, we can declare the jury to be in: the policy is working.

As the chart below shows 68 per cent of employees are now enrolled in a workplace pension scheme an extra 20 per cent of employees since the introduction of auto-enrolment in 2012.  But that’s not the end of the story. What more must be done to ensure pensioners of the next half a century and beyond build adequate pensions?

First, serious planning and cross-party support can play a big role. The Pensions Commission was a major undertaking drawing on a breadth of expertise and its recommendations were welcomed across the political spectrum – thereby avoiding the pitfalls of political short-termism that sometimes undermines reform.

Secondly, we must recognise that in pensions terms auto-enrolment is very much in its infancy – it won’t be until almost 2060 that the first worker retires with a full work life under then new scheme. Wide ranging coverage is only the first step towards success, contribution rates – how much people are putting into their pensions – are crucial.

As Figure 2 shows the large growth in workers contributing to a private pension has almost exclusively been among those with a DC scheme and a contribution of under 2 per cent. This reflects the current minimum requirements for workers to contribute 0.8 per cent, with an additional 1 per cent from employers and 0.2 per cent from the state. These are set to reach a total of 8 per cent by April 2019 – 4 per cent from the employee, 3 per cent from employers and 1 per cent from government. Increasing saving can prove tricky at the best of times but will be much tougher in the higher inflation and weak earnings growth mix expected over the next two years. Higher contribution rates will act as a further drag on pay packets.

But rates must be raised. Putting off the increase will mean it takes longer to build adequate savings for retirement, if at all – sooner is better than later. For some it may already be too late. Workers enrolled in the latter half of their working life with little previous saving may not have enough time. This is a particular risk for generation X and baby boomers not fortunate enough to have built significant savings. Future Resolution Foundation research for the Intergenerational Commission will explore the extent to which this is the case.

Thirdly, we need to think again about where gaps remain in coverage. Only workers earning more than £192 a week have to be enrolled, many low paid and part time workers miss out. The latest estimates are yet to capture the final phase of auto-enrolment in which the smallest employers are brought into the scheme, but currently less than a quarter of private sector workers earning between £100 and £200 a week have a workplace pension and just half of those earning £200 to £300 a week. The low paid savings gap is a gender one. Figure 3 shows that half of women with no workplace pension earn less than £300 a week, compared to only a quarter of men.

A further gap is missed entirely by work-placed pension data. The 15 per cent of the workforce who are self-employed are not captured. According to the latest HMRC estimates the number of self-employed making personal pension contributions has more than halved since the financial crisis to 380,000 in 2014-15. Over the same period the number of self-employed has increased by more than double that number, a rise of over 800,000.

Finally, we must remember that pensions are not the only source of income in retirement. Housing has played a particularly important role in recent years, with increasing rates of ownership among older generations facilitating trading down and reducing the likelihood of still having to pay rent beyond the State Pension age. But rapid reductions in homeownership rates among millennials mean that other forms of saving become even more important and open up the risk of a world in which living standards in retirement are increasingly affected by the position of parents.

In the short term at least auto-enrolment has been a huge success, despite being introduced in tough economic times. But pensions are a long term game and the policy still has far to go before it can be hailed a complete success. A key test will come over the next two years as minimum contribution rates rise. But a focus on rates should not distract from plugging gaps in coverage for lower paid workers and the self-employed which could mean future generations of pensioners miss out. This will be crucial to get everyone into the saving habit.