Workplace pension saving: in “jeopardy”?

On Monday 17th October MPs will debate the Government’s Savings (Government Contributions) Bill, aiming to create the new Lifetime ISA proposed in the Budget 2016.

Though the new measure to encourage and support savings was generally welcomed, the House of Commons Work and Pension Select Committee warned in May 2016 that Lifetime ISAs “could jeopardise the success of auto enrolment” –  which aims to encourage employees to save in a workplace pension.

So, what is auto enrolment?

From October 2012, an increasing number of employers have been required to auto-enrol their employees in to a workplace pension. Employees should be enrolled into a “qualifying pension scheme”. The National Employment Savings Trust, NEST has been set up as a “simple low-cost pension scheme” available to any employer who wants to use it for auto-enrolment.

… and who does it apply to?

Auto enrolment now applies to all workers:

  • Aged 22 and over;
  • Earning, in 2016/17, above £10,000;
  • Who are not already saving in to a workplace pension.

Workers can choose to opt-out.

Once enrolled, what must workers do?

Workers must make a minimum contribution to their scheme based upon their “qualifying earnings”. Once reforms are fully introduced, the minimum contribution will be 8% of qualifying earnings: 3% from the employer, 4% from the employee and 1% tax relief.

Okay… but why?

Plans for auto enrolment were first legislated for in 2008 and later amended in the Pensions Act 2011.

It is part of a package of pension reforms, aiming to encourage individuals to make private, earnings-related savings to complement their State Pension, suitably supported by contributions from their employer.

Alongside this, the State Pension has been reformed to create a simpler, single-tier, largely flat rate system.

Got it. So how many people have been auto enrolled so far?

The Pension Regulator’s monthly auto enrolment Declaration of compliance report shows that, at September 2016, 6.7 million eligible workers have been auto enrolled into a pension scheme. This total is expected to reach 9 million by 2018 (see the National Audit Office’s November 2015 report).

The proportion of employees currently saving in to a workplace pension increased by 16% points between 2012 and 2015, according to ONS data. In 2015 around 63% of employees were saving in to a workplace pension, compared to just under half (47%) in 2012.

The proportion of employees aged 22–29 saving into a workplace scheme has increased from around 31% in 2012 to around 60% in 2015 – an increase of 29% points.

So there’s nothing to worry about then?

Not quite. Though the broad policy has enjoyed cross party support, auto enrolment is not without controversy. Both the scope of auto enrolment – in particular, at what level the minimum ‘earnings threshold’ to qualify for enrolment should be set – and the adequacy of pension contributions and savings continue to be scrutinised.

Okay. So why might contributions be inadequate?

ONS data shows that the number of employees currently contributing to a workplace pension increased by around 41% from 2012 to 2015.

Increases have, however, been concentrated among employees contributing a relatively low proportion of their pensionable earnings.

The number of employees contributing less than 2% of their pensionable earnings (including contributions from both employees and employers) to a workplace pension almost doubled from 1.7 million in 2012 to 5.0 million in 2015. The number of employees contributing 2% or more of their pensionable earnings, however, remained comparatively stable – rising by 14% from 9.7 million in 2012 to 11.0 million in 2015.

Is this a problem for all savers?

It’s certainly true to say the proportion of workers contributing at under 2% has gone up across all ages.

Low contribution rates are particularly prevalent among people in their twenties and thirties, however. For instance, around 95% of all 22 to 29 year olds with a workplace pension now contribute under 2% of their pensionable earnings.

I see your point. But what has this got to do with ISAs?

Some commentators worry that if Lifetime ISAs are viewed as an alternative to workplace pensions, employees may choose to prioritise saving into their Lifetime ISA instead of their pension and, ultimately, be left worse off as a result.

In May 2016 the Work and Pensions Select Committee warned this may be a particular problem for savers with limited disposable income (see page 21 of the Committee’s report), for example. Similarly, the Institute for Fiscal Studies has stressed the need for more detail on whether LISAs will encourage savers to save more or simply to redirect their existing savings to a new product (see page 12 of the IFS’ post-Budget analysis).

While rejecting these concerns the Government has said, in response to the Work and Pensions Select Committee, it will produce an Impact Assessment for Lifetime ISAs and monitor the progress of auto enrolment.

Further information on the Savings Bill is available from the Library briefing Savings (Government Contributions) Bill [Bill 59 2016-17]. The Library briefing paper Pensions: Automatic enrolment – 2010 onwards provides background information on automatic enrolment. Also see the OBR’s October 2016 report, Private pensions and savings: the long-term effect of recent policy measures

Picture: “Workie“, from The Pension Regulator’s Don’t Ignore the Workplace Pension campaign