Could auto-enrolment defuse the pension time bomb?
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One of the standout achievements of auto-enrolment is that it has made young people realise they need to think about their pensions. This is a difficult task, because the perception is, understandably, that pensions are something to worry about when you're older. After all, pensions aren't needed until retirement. The problem is that although pensions won't be used until retirement (or 55 if you want to take some tax-free cash), the money doesn't appear in the fund by itself - it takes years of saving and growing that fund, and starting early gives the best chances of it being a healthy size when you need it.
For those in their twenties though, even if they want to save into a pension it isn't always easy. It's typically the time in life when earnings are low, and those who know what career path they would like still need to work up to larger salaries. Then there are the common outgoings like rent, utilities, running a car, overdraft and credit cards from student days, and perhaps the payments for further studying to help the chances of breaking into the desired career field. This creates a difficult situation of having a lot to pay out but not bringing a lot in, so the thought of saving is easily dismissed - especially when it's for something that won't be needed for another 40 years.
"I'll start next month" or "Once I get a new job" may be genuine affirmations at the time, but life can get in the way and that money is gone before you know it. And that's why auto-enrolment has potential to be powerful: pension contributions are deducted from the salary, so it isn't a conscious effort to save it. Of course, people can opt out if they don't want to save into the scheme and for people who truly can't afford it that may be the only option, but the majority of people have stayed in it. The upshot of this is millions of people will have a pension for the first time, and so many people have stayed in the scheme that the Department for Work and Pensions has halved its predictions of opt outs - from 30% to 15% because 90% of employees in the biggest firms remain in the scheme.
Pension Square has a collection of videos with interviews of people explaining their experience and opinion of auto-enrolment, and these videos highlight that auto-enrolment is helping workers of various ages. The younger people were particularly enthused about the positive effects of a pension on their future though, as they had never had one before.
Jon Delargy, whose position with B&Q Coventry was his first role since graduating university, said he remained in the pension because of how important it is "to plan for your future".
Another employee of B&Q Coventry, Rob Karen, explained that "the pension is a real investment in my future... it's worth getting on the bandwagon and getting it sorted now."
Kerry Hassell, of Travelodge in Cardiff, said that she had originally turned down the company pension because she was young when she joined, but when auto-enrolment was implemented she remained opted in, stating: "it's really easy... you don't even notice it going out of your pay" and that "it's good to know you're making your future more secure through having a little bit of money put away each month."
For raising awareness, auto-enrolment appears to have been very successful. The potential downside is if people start to think that making the minimum contributions will be enough for a comfortable retirement; at this stage, the minimum is only 0.8% of earnings (totalling equivalent of 2% after employer and government contributions), and although they will increase in the future it's important for each individual to consider increasing how much they pay in.
There are also people who will not be part of auto-enrolment, such as the self-employed. This is a concern because while the UK's employment rate has improved, that has been fuelled by a surge in people working for themselves. To be part of auto-enrolment, an employee must be over the age of 22 and earn at least £8,105 per year. People earning less than that, such as part-time workers, can ask to be enrolled, and their employer must also make a contribution if they earn over £5,564, but this puts the onus on the individual to join the scheme and low earners are more likely to feel unable to afford contributions to a pension.
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