PENSIONS
AE pensions in the UK: a good start, but more to do
Ian Bell, Partner and Head of Pensions, RSM UK, celebrates the successes of automatic enrolment (AE), while also considering what more can be done in this area to ensure adequate retirement incomes A E pension contributions were introduced in the UK in 2012, with the goal of addressing Under the AE system, contributions are shared between employees, employers and the government (through tax relief). Minimum contributions currently stand at 8% of qualifying earnings, with employees contributing 5% and employers
to the prescribed minimum contribution rate of 8% of qualifying earnings was always a risk. This level is widely regarded as insufficient to provide an adequate retirement income and has undoubtedly produced a generational divide in the size of pension savings. The Pensions and Lifetime Savings Association estimates that an individual needs to save at least 12%-15% of their salary over their working life to achieve a moderate standard of retirement living. Additionally, the current system calculates contributions only on "qualifying earnings". This disproportionately impacts lower-income workers and reduces the overall savings accumulated over a lifetime. Reforming this structure to include all earnings could significantly enhance retirement outcomes. Limited coverage for certain groups While participation has increased, certain groups remain excluded. Workers earning below £10,000 per year and those under 22 years old aren’t automatically enrolled, despite many of them needing retirement savings. They can, however, request to join a pensions scheme from the age of 16, and the government has confirmed it plans to reduce the age of AE from 22 to 18 during this Parliament, together with a reduction in the starting level of qualifying earnings. Additionally, self-employed workers, who make up around 15% of the UK workforce, aren’t covered by AE at all. As a result, significant portions of the population are missing out on the benefits of regular pension contributions. Rising cost of living The ongoing cost-of-living crisis presents a major challenge for the future of AE. With inflation and rising household expenses, many employees may feel pressured to opt out of pension contributions to prioritise immediate financial needs. There’s also a risk of knee-jerk reactions
the growing retirement savings gap and ensuring more people were financially prepared for their later years. Since its inception, the system has seen significant success, increasing the number of people saving for retirement and fostering a culture of long-term financial planning. However, despite its achievements, there remain critical areas for improvement to secure better retirement incomes for future generations. RSM UK evaluates the successes of AE and explores reforms needed to enhance the system. Successes of AE Increased participation in pension schemes One of the most notable successes of AE has been its ability to significantly increase participation in workplace pension schemes. Prior to 2012, only 55% of eligible employees were contributing to a workplace pension. By 2021, this figure had risen to 88%, according to the Department for Work and Pensions. This sharp increase demonstrates the effectiveness of AE in overcoming inertia and a lack of awareness about pension savings. The opt-out rate for AE has also remained relatively low, at around 8%-9%. This suggests that once employees are enrolled, the majority choose to remain in their scheme. Behavioural economics explains this trend through the concept of "default bias", where individuals are more likely to stick with a pre-set option. This theory has been tested in recent years as the cost-of-living crisis has led to a small increase in opt-out rates. The triennial re-enrolment of employees is designed to help address this trend.
contributing 3%. This shared responsibility has helped increase the overall savings pool, while easing the financial burden on individual savers. Inclusion of underserved groups AE has been particularly successful in bringing previously underserved groups into the pension system. For example, younger workers, women and those employed in lower-income roles have seen significant increases in participation. Women in particular, who have historically faced barriers to pension savings due to career breaks or part-time work, now participate in workplace pensions at rates comparable to men. Establishing a savings culture Another critical achievement of AE has been its role in fostering a culture of saving. Awareness campaigns and regular contributions have normalised pension savings as a standard aspect of employment, helping to combat the widespread under-preparation for retirement that characterised the years before its introduction. Challenges and areas for improvement While AE has successfully increased participation rates, challenges remain in ensuring these contributions translate into adequate retirement incomes. Several structural and policy issues need to be addressed to improve the system’s effectiveness. Contribution rates are too low While AE has succeeded in increasing participation, employers “levelling down”
Contributions from employers and employees
PROFESSI NAL in Payroll, Pensions and Reward
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June 2025 | Issue 111
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