10 years of auto enrolment.

This October has marked the 10th anniversary of auto enrolment. Jonathan Watts-Lay, Director, WEALTH at work, a leading financial wellbeing and retirement specialist, answers some key questions on the topic and gives his thoughts on how the cost of living crisis could impact pension savings and how the workplace can help.

Q: How successful has auto enrolment been?

A: More than 10.7 million employees have been automatically enrolled into workplace pensions as of June 2022.

Q: What has been the impact of rising living costs on pension savings?

A: Figures from the Department for Work and Pensions show that there has been no significant rise in people choosing to stop contributions who are currently saving into workplace pension schemes. However, there does appear to be an upward trend for those newly enrolled choosing to opt out. As the cost of living crisis continues, employers should closely monitor pension opt out requests and do all they can to ensure pension scheme members recognise that it really should be a last resort.

Q:  What are the risks of cutting back on pension savings?

It is understandable that employees may look at their pension contributions as a way of cutting back on their monthly costs.  But it’s important for them to understand that opting out of their pension will have a huge impact in the long term, and really has to be an absolute last resort. If employees are considering this, making the smallest reductions in pension contributions possible, and avoiding opting out altogether, will limit the reduction to future retirement savings.  Saving money is a habit, and once it’s stopped it, it is very difficult to start up again.

Before reducing or stopping contributions, employees should make sure they check all their outgoings to find other ways to save money first, e.g. cancelling any unused subscriptions or memberships, shopping around for better deals on insurances at renewal such as car and household as well as broadband and mobile suppliers, and switching brands on their regular shop. Also, discount vouchers are often available online, and discount schemes may also be available through employers.

Q: How much should someone be saving for retirement?

A: It can be difficult for someone to judge how much they may need to save for retirement as everyone has different circumstances and different expectations. There is much confusion about this and WEALTH at work’s survey found that more than a fifth (21%) have no idea how much their pension is worth, with almost a quarter (24%) having no idea how much they will need to have for a comfortable retirement.

Employees need to look at their pension statement, and understand the pension income they are likely to retire on based on their current contributions, and if this matches their expectations or if they need to save more.

It can be helpful to understand what level of income they may need in retirement. Accordingly to the Pensions and Lifetime Savings Association (PLSA), a single person will need about £11,000 a year to achieve the minimum standard of living (this would cover all a retiree’s needs plus enough for some leisure activities such as a week’s holiday in the UK and eating out occasionally); £21,000 a year for a moderate standard of living (a two-week holiday in Europe and more frequent eating out); and £34,000 a year for a comfortable standard of living (this would cover all a retiree’s needs plus enough for two foreign holidays a year plus some luxuries such as regular beauty treatments). For couples, it’s £17,000, £31,000 and £50,000, respectively.

Q: Should the auto enrolment age and earning limits come down?

A: One way to enable even more employees to save into their pension through auto enrolment would be to reduce the auto enrolment age, and the earning limit.

A government study revealed that over two-thirds of employers are in favour of lowering the age at which people are automatically enrolled into a pension from 22 to 18, which is in line with a recommendation by The Department for Work and Pensions s in 2017.

Q: What about when employees move jobs? Are there any issues around having multiple pension pots?

A: Having multiple pension pots is unlikely to be beneficial for most people. Employees will need to be aware of this.

Firstly, there are flat rate charges for schemes with more than £100 in, so someone could be getting charged for multiple pots which could quickly diminish their savings.

Also, different pots could each have different investment strategies, and potentially different default retirement ages. It is important for employees to understand the significance of making sure their investment strategy and expected retirement age reflect their plans.

It is also a challenge administratively, as people need to update each pension provider as their plans change. When moving house for example, they would need to inform each pension provider with their new address to ensure they are receiving the communications. This could require getting in touch with multiple pension providers.

Employees may want to consider consolidating their pensions into one pot, as it could make it easier for them to manage their finances, rather than having to check the performance of multiple accounts. If they are changing jobs, it is important that they know not to transfer their existing pension until they have left, to ensure they receive all their employer contributions.

Q: What can employers do to help?

A: Overall, auto enrolment has been a great success but more needs to be done to ensure employees understand how valuable their pension savings are, as well as how to make the most of them. For example, an employee in their 20s, saving an extra 1% a year with their employer matching this, may be able to increase their pension pot in retirement by 25%. It is also crucial that employees understand the damage they are doing to their standard of living in retirement if they reduce their pension contributions now. They are likely to make relatively small savings each month, but the impact on their retirement savings in later life will be dramatic due to lost employer contributions and tax relief, and this really should be a last resort.

As part of an overall wellbeing objective, many employers now offer their workforce support to help them understand the value of their pensions and workplace savings, as well as how to best manage their money in times of crisis. This includes providing financial education workshops, one-to-one guidance or coaching and digital tools and helplines. This can help employees to build their financial resilience now and for the future.