Bad news comes thick and fast these days, from climate change to war to inflation. So it is worth pausing sometimes to appreciate good news, especially when it shows the power of policy to change things for the better.
Last week brought one such opportunity, when official data revealed just how successfully the UK has got people from all backgrounds to save for their futures in workplace pensions.
In 2012, Britain became one of the first countries to require employers to enrol almost all employees automatically into a workplace pension. Workers could opt out but by default both they and their employers would pay in. In the decade before this intervention, the proportion of employees participating in a workplace pension had declined steadily from 57 to 47 per cent. Now the figure is almost 80 per cent.
The policy has been most transformational for people who work in the lowest-paid and least secure sectors. Participation rates increased from 5 per cent to 51 per cent between 2012 and 2021 in accommodation and food services, and from 14 to 64 per cent in admin and support services.
There is still plenty to complain about. Defined contribution pensions place a lot of risk and insecurity on the shoulders of individuals. Some people are not enrolled automatically because they earn below £10,000 a year or are aged below 22. The contribution rates are relatively low — the UK gathers 8 per cent of salary from employer and employee, while Australia’s scheme is on course for 12 per cent by 2025. But even the grumpiest critic would agree the pension system is in a better place than it was before 2012. A number of other countries have adopted similar systems; Ireland announced the details of its version just last month.
Indeed, some experts have questioned whether auto-enrolment has been too successful. Is the power of inertia so strong that some cash-strapped workers are saving into a pension when they would be better off opting out for a while? A paper by the Institute for Fiscal Studies found that even among the least financially secure 3 per cent of eligible private sector employees — those with scant or no savings, unable to afford necessities, on very low incomes and with poor health — participation rates were above 90 per cent.
Will Sandbrook, executive director of the insight unit at Nest, the state-backed pension fund with 10mn members, says it’s a tricky question. “As a deal it is a very good one, and for most people most of the time, it’s therefore something they should probably try and preserve,” he tells me. “I think where it gets complicated is if people are starting to trip over into problem debt.”
In the pandemic, opt-out rates did edge higher for a while, which Sandbrook sees as a sign that “a number of people can make the decision for themselves”.
The bigger worry is the self-employed workforce, which isn’t covered by auto-enrolment at all. It’s not only that they have been left behind — their participation in pensions has collapsed. In 1998, 48 per cent of the self-employed contributed to a private pension, according to the IFS. By 2018, the figure was just 16 per cent. The number of self-employed people has risen over that period from 3.4mn to 4.8mn.
The reasons for this trend aren’t clear, though surveys suggest it is some combination of affordability (it has not been a good two decades for the incomes of the self-employed) and a preference to save through property. Participation has fallen the most among self-employed people with the highest earnings.
Nest is exploring various ways of using the power of inertia to encourage the self-employed to save in pensions, for example through default options in popular accounting software packages.
Meanwhile, policymakers should apply more pressure to gig economy platforms. Courts are increasingly ruling that these platforms are employers, in spite of their protestations they simply connect self-employed workers with customers. It would be administratively fairly simple for platforms to auto-enrol these workers. Uber has already done so in the UK after it lost a Supreme Court case last year, though it is now embroiled in a row about the lack of a sharia-compliant option. Even if a gig platform refused to concede it was an employer, it could still gather worker pension contributions.
Policies with the transformational impact of auto-enrolment don’t come along every day. The complexity of how to deal with the self-employed shows that many problems are harder to tackle. Nonetheless, the story of auto-enrolment is a reminder that policymakers do have the power to change the future. Fatalism is fatal.
Letters in response to this article:
Auto enrolment’s success is down to Adair Turner / From Richard Smerdon, London SW13, UK
UK is sleepwalking into a bigger savings crisis / From Pete Glancy, Head of Policy, Pensions & Investments, Scottish Widows, Edinburgh, UK