DWP data "a clear reminder that auto-enrolment was a great start, but not a full solution"

AUTO-ENROLMENT may have brought millions into pension saving, but most are stuck at the minimum 8%, and that’s simply not enough for a comfortable retirement, one expert has said following a report published today by the Department for Work & Pensions.

The report showed that, in 2023, the average contribution rate as a percentage of total pay for those saving was lower compared to the level before AE rollout in 2012. The DWP says this reflects how auto-enrolment has brought in new savers saving at lower contribution levels, with many at the AE minimum.

In addition, there has also been a shift of employees moving from saving into Defined Benefit (DB) schemes to saving into Defined Contribution (DC) schemes, where average contributions have historically been lower.

AE criteria require that eligible employees (those earning over £10,000 per year and aged between 22 and State Pension age) are entitled to minimum total contributions of 8% of qualifying earnings (currently earnings between £6,240 and £50,270), of which at least 3% is contributed by the employer. Employers can, and many do, pay more than the minimum. Likewise, employees can also choose to contribute more into their workplace pensions.

Philly Ponniah, Chartered Wealth Manager and Financial Coach at Philly Financial, said that “while auto-enrolment was a great start, it's not a full solution”.

She added: "Yes, it’s brought millions into pension saving, but most are stuck at the minimum 8%, and that’s simply not enough for a comfortable retirement. Employers are under pressure, too, and it’s understandable that many can’t stretch contributions further right now, especially with higher national insurance costs. But that makes personal awareness even more important. People need to know what 8% really gets them, and why it matters to put more aside for the future.

“The shift from Defined Benefit to Defined Contribution means the risk and responsibility now sits with the individual. Without better education on investing and understanding risk, many will unknowingly fall behind. It’s not just about saving more, it’s about making what you do save work harder. Otherwise, we risk creating a generation that thinks they’re doing the right thing, while falling short.”

Scott Gallacher, Director at Rowley Turton, said the government set the bar too low: "When the government introduced auto-enrolment, they took the easy way out by setting the bar too low. The qualifying earnings threshold hits part-time workers hardest, especially those in retail and hospitality, sectors dominated by women.

“In my view, this structure amounts to a form of indirect sex discrimination and I’ve never understood how it was allowed to happen. I raised the potential for indirect sex discrimination with the government at the time, but never got a straight answer. If we’re serious about closing the gender pensions gap and improving retirement outcomes, fixing these flaws in auto-enrolment must be a priority. That said, fixing it now, during a time of economic pressure, is a tough ask. But if we don’t address these structural flaws soon, we’ll be locking in poor retirement outcomes for millions.”

Rob Mansfield, Independent Financial Advisor at Rootes Wealth Management, said education, or the lack of it, is a fundamental issue: "Retirement is expensive and, as defined benefits work their way out of the system, it's no surprise that contribution levels have declined. The buck has been passed from companies to individuals without the education needed to make that work. 8% of your salary isn't enough to provide many people with a decent standard of living in retirement.

“Everyone has a role to play in encouraging people to engage with their pensions. That means a set of rules that stay steady, so people can rely on them. We need clear documentation that speaks like a human does, a focus on value rather than just costs and better education around risk and investment growth.”

Samuel Mather-Holgate, Independent Financial Adviser at Mather and Murray Financial, added: "The government are in a bind. Their ambition to increase pension savings is laudable, but by setting minimum thresholds they have created an artificial standard. Companies that would have offered matching contributions on full pay are now told that minimum thresholds are much lower than this, based on a reduced thresholds income and employers don’t need to match employees savings.

“The government need to roll out an information message rather than just rules and regulations. They need to sell the idea of higher pension contributions for both parties. With national insurance on businesses at historically high rates, the rebate available on employer contributions should incentivise them to make higher payments, but maybe that’s not a rationale the government want to shout about.”