What official data tells us about
workplace pensions

Workplace pensions have been on a tear since 2012 in terms of participation, thanks to the introduction of auto-enrolment. 

Using the power of inertia, more than 10m people have been automatically enrolled into a workplace pension, meaning a better retirement outcome for millions of Britons.

According to the Office for National Statistics, 78 per cent of UK employees now have a workplace pension, compared to less than 50 per cent before AE was introduced in 2012.

But the latest ONS figures also show that while millions of people are now participating in a workplace (largely defined contribution) pension scheme, the rate at which people are joining has been tailing off.

In 2020, the number of Britons saving into workplace pensions was only incrementally higher than in 2019.

While some commentators are hoping this is just a blip caused by the uncertainty last year around Covid-19, others have warned that gaps in participation across different sectors in society are starting to become ever more apparent.

The public/private gap

Moreover, public sector scheme employees were still significantly more likely (90 per cent) to have a workplace pension than those in the private sector (73 per cent).

Kate Smith, head of pensions at Aegon, says the figures show up the "weakness" in AE, and cited the disparity among workplace schemes as evidence of this.

According to Smith: "The weaknesses in the AE criteria are evident.

"This is clearly demonstrated by the stark disparity between public and private sector workplace participation rates for those who don’t meet the AE criteria on the grounds of age or not meeting the annual earnings trigger of £10,000 in a single job.

"Employers in the private sector are more likely to stick to the auto-enrolment criteria, whereas in the public sector, pensions are more likely to be open to all employees based on full earnings."

Employees are eligible to be auto-enrolled into a workplace pension once they earn more than £10,000 a year and are aged between 22 and the state pension age.

But as Smith points out: "The pension divide is clearly demonstrated by those under the age of 22, the minimum age to be auto-enrolled into a workplace pension. In the private sector, only 16 per cent of this group were in a workplace pension scheme – the number was five times higher for those working in the public sector.

"It’s a similar story for those over the SPA where employees in the public sector are twice as likely as those in the private sector to be in a workplace pension."

So is the public sector just doing a better job of promoting pension scheme involvement? Are private sector employers holding back on being forthright about the benefits on offer? Are private sector employers doing just the bare minimum to be within the law?

These are questions that need to be addressed if the private/public gap is to narrow over the next few years.

There is certainly an educational aspect, according to Baroness Ros Altmann, independent pensions consultant, in getting people excited about workplace pension provision.

She says: "We need the industry to reach out to all these new customers to help them understand why pensions are so brilliant for them, and why they are such a tax-efficient and financially efficient way of saving for their own future."

A Covid blip?

When it comes down to the levels of contributions, Ian Browne, pensions expert at Quilter, says these gaps need to be monitored as they may be more than just a short-term pause caused by the pandemic.

He explains: "This year marks the first time since the introduction of AE that overall participation has not improved. This may be due to more people feeling like they need more money in their pocket today, or it could simply be that participation has hit a ceiling and, unless other policy levers are pulled, this figure is unlikely to budge.

"As the economic realities of the pandemic become clearer, it will be interesting to see whether this figure remains flat or even drops if people’s finances are put under more strain."

At the end of last year, Fidelity commissioned research that found 23 per cent of people had experienced a fall in income through the pandemic. 

James Carter, head of pension products and policy for Fidelity International, comments: "Pressures on household incomes may have prompted some people to drop out of workplace schemes with the need for more disposable income.

"What’s encouraging is that there wasn’t a bigger drop in participation in the first few months of the pandemic, but the impact through the rest of the year is yet to be seen."

But Alan Chan, director of IFS Wealth & Pensions, says it is too easy to blame everything from 2020 on the coronavirus crisis.

He says: "I’d like to blame Covid for this as it would be the simple answer, but it appears the data is to April 2020 and we’d only just started lockdown then, so this could not have been the culprit.

"If it’s the participation tailing off then as the ONS stated, this can be explained by employees choosing to leave the scheme (opting out) and perhaps non-compliance [to AE] from employers."

There is also a related concern, that of contributions being made by those within the pension schemes. 

Minimum contributions for DC schemes are based on what is known as ‘qualifying earnings’.

Nest describes qualifying earnings thus: "These are a section of a worker's pay. For the 2021-22 tax year this is everything over £6,240 and up to £50,270. The qualifying earnings band is reviewed by the government each year."

Workers who earn at least as much as the lower threshold each year are entitled to a minimum contribution into their retirement pot.

For the 2021-22 tax year, the workers' minimum contribution rate will be 5 per cent. Accordingly, 1 per cent of this is paid by HM Revenue & Customs as basic-rate tax relief.

The maximum contribution rate is 8 per cent; but even if everyone in 2021 were to pay the maximum contributions allowed under auto-enrolment, the worry is this is still not enough to boost the amount of money being saved on average. 

This could present a double whammy: not only is participation tapering off but also contributions being made might not be enough to secure a comfortable retirement for those who are participating. 

Thinking more widely

There are also more than 5m people who are self-employed or in the gig economy, for whom workplace pensions have been out of reach.

Despite recent rulings, such as the Uber ruling that found its drivers were indeed employees for the purposes of workplace benefits such as a pension, millions of people are still without adequate pension provision as a result of their employment status.

This is the next big thing to consider, according to pensions professionals.

Quilter's Browne adds: "We must also start to think about how [workplace schemes] can be replicated or tweaked to suit other types of workers, such the self-employed, who continue to fall outside of the scope of AE."

He points to research from the Pensions Policy Institute, which has shown that only 15 per cent of the 5m (and rising) self-employed people in the UK were saving into a private pension in 2019.

Browne says: "Unfortunately, due to the nature of the last year, many self-employed people have suffered a significant financial shock and therefore are unlikely to be prioritising their pension provision at the moment.

"A solution to help prompt this group of workers to save for retirement needs to be looked at urgently as their financial needs differ from much of the rest of the working population.”

What next?

Fidelity's Carter agrees the industry and government need to work together to help those who are the self-employed and those with multiple part-time jobs.

But he also advocates working to fix the gender pension gap, given that women tend to have lower contribution levels.

He explains: "From here it is all about the next stage of AE and improving engagement.

"Expanding the basis for minimum contribution rates and supporting those who might have dropped out of schemes to re-enrol are priorities, but so is increasing the focus on tackling pension savings gaps across different working populations.

"We need to focus on how workplace and private pensions can better support women’s contribution levels, the self-employed and those with multiple part-time jobs – an increasing and important component of the working population."

Carter adds: "AE has been a huge success, but is only a foundation and we must continue our work to ensure consumers are aware of their options when it comes to workplace and private pensions.”

Aegon's Smith agrees. She comments: "The pensions gender gap is clear to see among part-time employees in the private sector, with almost twice as many part-timers working in the public sector belonging to a workplace pension.

"Around three times as many women as men work part-time, and with median earnings for part-timers at £11,000 a year, many will not have met the AE criteria."

Although the ONS data indicated that women working full-time had slightly higher participation rates than men (females: 88 per cent; males: 85 per cent), she warned the pensions gender gap is set to persist "for many years".

This is due to women earning on average 7.4 per cent less than their male peers.

Smith adds: "Lower earnings means lower contributions and lower pensions, which is compounded by women being more likely than men to take time out of work for caring responsibilities."

Chan is in full agreement. He says there is a general acceptance that the AE rates are not sufficient but it was always seen as a "stepping stone" in the right direction.

He comments: "We are in a far better place now in terms of retirement provisions as a nation than before AE came in. But it needs to go further in order to provide a decent level of income in retirement, otherwise people have a false sense of security thinking that just because they’re paying into a workplace pension that they will be OK when they retire.

"Far from it at current minimums. There’s no two ways about it: minimum contributions need to be much higher, at least double what they are now, and it must be compulsory participation in workplace pensions and do not allow opt outs, like in Australia."

So if the ONS figures are to tell us anything, it is that AE has worked – at least until now – but there are still several more mountains to climb before the UK's pension gaps are closed and millions more people are brought into some form of pension saving.

simoney.kyriakou@ft.com