Ten years ago, a government policy came into law that would go on to financially benefit over 10 million people in the UK, giving them a greater stake in our economy and more security later in life.
Automatic enrolment is an untold, underappreciated success story that we should look to build on and expand. For all the talk of our increasingly divided politics, on this there is consensus across the political spectrum. Indeed, we owe the system and its successes to the efforts of our three main political parties. It was a Labour government which first set up the Pension Commission to recommend a response to a dire outlook for private pension savings, and then legislated for automatic enrolment in 2008. The policy was carried forward with enthusiasm by the Conservative and Liberal Democrat coalition government in 2012.
Today, once a worker is older than 22, and earning above £10,000 annually, 5 per cent of their income above £6,240 is automatically put towards their pension. Employers then contribute an additional 3 per cent boosting their savings for later life. The results have been remarkable; 88 per cent of those eligible now save for a pension, up from 55 per cent in 2012. 10 million extra savers are contributing an additional £17bn a year, two million fewer people are under-saving for their retirement than otherwise would have, and the youngest and lowest earners have seen the greatest improvements.
It also has a positive social impact, helping to equalise the participation rates of men and women, as well as eliminating the mental health pension participation gap which saw lower savings rates among those with poor mental health.
It has cultivated a greater savings culture in our country and reinforced the property-owning nature of our democracy. When the country and the economy does well, savers do well. In this way, millions more have more skin in the game when it comes to the economy which translates to greater engagement at the ballot box – giving their vote new salience and personal consequence.
Even with this success, we need to look at how it can be improved. I strongly endorse, as I set out today in a new report with the Social Market Foundation, the government’s aspiration to expand the policy to those aged between 18 to 21-years-old whose need is greatest.
Only one in five of those eligible in this age group are enrolled in a workplace pension. But young workers will need their personal pension savings to go further as more of their generation live longer. In fifty years time, when workers aged 18 years old today enter retirement, the ONS predicts that the number of people in Britain aged 65 or above will nearly double to exceed 20 million.
Compound interest can help to meet demographic demands, but it is important to note that its benefits are amplified the earlier you save; of two people the same age with a salary of £19,500, the one who starts saving at 18 will, with compound interest, have saved £40,000 more by the age of 65 than the one who started at 22.
There is an understandable anxiety about lumping younger workers with an unwelcome burden. But these very same objectors were raised for automatic enrolment in 2012. For businesses, extending automatic enrolment to young workers could even reduce administrative costs by bringing the threshold in line with the national minimum wage. For young workers themselves, automatic enrolment reduces the perceived burden of saving by avoiding the jarring transition they currently make from zero pension contributions to 8 per cent at the age of 22.
The bottom line is that the combination of demographic, environmental, and mental health pressures means there has arguably never been a generation for which saving early has mattered more. We have at our disposal a policy with a proven track record of increasing pension participation rates. In every sense, automatic enrolment has the power to save – let us extend it to our youngest workers as soon as possible.
Appeared in CityAM 15 March 2022