Why this year is the real test of auto-enrolment

In the nearly three years since the roll out of auto-enrolment, it has consistently been hailed a success; but the real challenges are yet to come.

This year sees small and micro employers forced to provide pensions for their employees. They will join large and medium-sized employers whose workers have taken well to the semi-compulsory pension scheme.

Since its 2012 launch opt-out rates – those choosing to opt out after being automatically enrolled – have been just 10%, far lower than predicted.

But that doesn't mean we can all just sit back safe in the knowledge that the pensions savings crisis has been averted. The greatest risks are yet to come for the auto-enrolment and the challenge of getting the nation to save enough for their retirement in an era where the state is withdrawing support and the burden of paying for old age will lie almost solely with the individual.

For smaller employers, the opt out rates could be double the 10% we've seen so far. A survey by the Association of Consulting Actuaries predicted opt-out rates for small and micro employers could be in the region of 16% to 20%.

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There are also other factors to consider in the shift in opt-out rates; higher contributions. Over the next two years, contributions will reach 8% - made up of 4% employee contributions, 3% employer contribution and 1% tax relief from the government.

For many this push up of just a couple of percent will be too far when wages have remained relatively static for the past five years. And it is likely the contribution rate will not stop there as it is a well-discussed fact that 8% contributions are not enough to produce a sufficiently comfortable retirement income.

Throw in a rise in interest rates in the next couple of years, that will push up mortgage costs and stretch people's domestic finances further, and you will find that pensions fall further down the to-do list.

The government is keen to build a savings utopia where we are all contributing readily and heavily to our retirement in the promise of jam tomorrow but with people's finances still feeling the pinch and the proliferation of zero-hours contracts, there is a gaping hole in the plan.

This year will be a testing one for auto-enrolment that will give us a true picture of the nation's finances and priorities. Let's home that pensions are top of the list.

Read more:
Pensions: is auto-enrolment doomed to fail?

Auto-enrolment: some still not invited to the party

What would Thatcher think of auto-enrolment?