The workplace pension participation rate in the UK has increased as a result of automatic enrolment, rising to 79 per cent in 2021 from 47 per cent in 2012, according to data from the Office for National Statistics.
In a report titled ‘Employee Workplace Pensions in the UK,’ the ONS found that the workplace pension participation rate in the UK is now at 79 per cent, equating to 22.6 million employees in April 2021, up slightly from 78 per cent in 2020. The participation rates gap between public and private sector pensions has been at one of its lowest levels of 91 per cent and 75 per cent respectively. The increase was attributed to the increased public sector employment spurred by the government’s response to the pandemic, according to the ONS.
According to industry experts, the minimum auto-enrolment contribution rate will lead to retirement disappointment for millions of employees. If a 30-year-old earns £30,000 a year and contributes 8 per cent of his or her salary to a pension each year, at the age of 68 (state pension age), he or she may have a fund worth roughly £306,000. This may provide £10,000 in pre-tax income every year in drawdown until age 97, as well as £76,500 in tax-free cash. If a 40-year-old earns £30,000 a year and contributes 8 per cent of their salary each year, they may have a fund worth £168,000 at the age of 68. This may provide a pre-tax income of £5,500 per year in drawdown until age 97, as well as £42,000 in tax-free cash.
AJ Bell head of retirement policy Tom Selby says: “Automatic enrolment has undoubtedly been successful in dramatically boosting the number of people saving something for retirement. However, the reforms remain half-baked, with millions of people ineligible and minimum contributions too low to deliver a decent income in retirement. Making ends meet is extremely challenging for lots of people at the moment, let alone saving for the future. But the reality is if you don’t take responsibility for your retirement sooner rather than later, you risk being forced to work until you drop or accept a lower standard of living in your later years.”
“What’s more, millions of self-employed workers remain entirely excluded from auto-enrolment, with many saving little or nothing for retirement. This is the section of the labour market most at risk of retirement penury, with no specific plans currently in place to help them. To put it bluntly, as things stand self-employed workers are like the Titanic, unwittingly on a collision course with a giant retirement iceberg. Without urgent action, this will become the next pensions disaster in the UK.”
Standard Life managing director Colin Williams says: “Today’s figures highlight the huge transformation that has taken place over the last decade as auto-enrolment has brought huge swathes of the workforce into pensions for the first time. Since its introduction participation has risen to 75 per cent in the private sector from 32 per cent in 2012.
“As this scheme approaches its ten year anniversary it faces arguably its biggest test to date. The current cost of living crisis is squeezing household budgets and while savings rates have held up well to date, many people will be assessing every cost right now. This is evident in the figures where participation among private-sector workers earning between £100 and £199 a week is far lower than the average at 43 per cent. However, the pandemic indicated that savings habits, once formed, tend to stick and we’d hope that people would take the long view when it comes to preparing for retirement.
“One of the main barriers to increasing participation further is the current structure of auto-enrolment. In time we’d like to see a reduction in the age at which people become eligible to 18 and the removal of the lower earnings limit so that people benefit from the first pound of earnings. At present, the current system disproportionately excludes many women and part-time workers who would like to start saving.”
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey says: “Looking closely at the data we see that while eight out of ten eligible employees now have a workplace pension, this falls to just two in ten among those who are currently too young to be auto-enrolled -the under 22s. Similarly, those who fall beneath the earnings trigger of £10,000 are also much less likely to have a workplace pension and so miss out on valuable contributions to their retirement.
“The government pledged in its 2017 Auto-enrolment Review that it would look to widen out auto-enrolment by lowering the minimum age to 18 and allowing people to contribute from the first pound of their earnings. It is clear these actions would considerably boost participation among these underserved groups and give them the opportunity to save more for longer and build a more resilient retirement as a result. Anyone who feels they can’t afford it is able to opt out, but the data overwhelmingly shows that the vast majority of people remain in their pension once they’ve been enrolled.
“However, it has so far been evasive as to the timeline for these potential changes. The review initially gave a mid-2020s timeframe but when pressed on the issue recently the pension minister would only say the reforms would be brought about “in the fullness of time”. These are important next steps in the evolution of auto-enrolment, and they must not be kicked into the long grass.”
Aegon head of pensions Kate Smith says: “The good news is that the pension participation rate is at a record high at 79 per cent of employees, with 22.6 million employees saving in a workplace pension in April 2021. Encouragingly, the pension participation gap is continuing to narrow between the public and private sectors driven by increased participation in private-sector defined contribution schemes – a clear indication that auto-enrolment is working. And the gender participation gap is narrowing for full-time employees, with females leading the way.
“However, the latest data clearly shows that more work needs to be done to help low earners and younger employees save into a pension. Only 20 per cent of employees aged between 16 and 21 are in a pension scheme and the pension participation rate in the private sector was only 43 per cent for those earning between £100 and £199 a week, compared to 88 per cent in the public sector. This shouldn’t be a surprise given these groups are largely excluded from auto-enrolment. Employees need to have reached the age of 22 and earn over £192 per week to be auto-enrolled into a workplace pension scheme.
“Many employers will open up their workplace scheme to all employees, although others will just follow the letter of the law, doing the bare minimum, and exclude these groups. Implementing the 2017 reforms of auto-enrolment will go some way to addressing this issue, as the minimum age will be reduced to age 18 and anyone earning below the £10,000 earnings trigger should be able to ‘opt-in’ and receive an employer pension contribution.”