Our pensions experiment looks good but we need to raise the stakes

Auto-enrolment is the first attempt to get people to save for their future since the Second World War

As a nation it appears we have forgotten how to save – or many of us simply think it is not worth doing so. After all, the state will always be there to look after us, won’t it? Even though it should be apparent to everyone by now that such an attitude is unsustainable, it has been encouraged by successive governments forever making unaffordable spending pledges to ingratiate themselves with voters.

On current demographic trends, taxpayer-funded provision of cradleto-grave benefits will bankrupt Western economies. Looking 40 years ahead, almost everyone will have to make their own plans for difficult times because governments cannot underwrite the ballooning liabilities without imploding.

Anyone who thinks the state pension is enough to live on has been seriously misled. According to the OECD, Britain’s is one of the least generous in the world, though the chances that any country will be able to sustain existing benefits with people living longer are slim. Yet the proportion of incomes being set aside for old age or unforeseen circumstances has fallen to a record low.

In one area, however, there is a good story to tell. The number of people contributing to pensions has grown significantly because of autoenrolment. Since the policy was introduced in 2012 – some six years after it was recommended by the Pensions Commission chaired by Lord Turner – nearly 10 million employees in one million companies who would not otherwise have joined a scheme have been signed up.

Surprisingly few – just one in 10 – have opted out, partly because the contributions have been held to less than one per cent of salary. But this is about to change. From Friday, the employee will be expected to pay three per cent into the pension; and from April next year, five per cent. Even though the employer is expected to top this up to eight per cent, no one is sure how this increase will affect the number of staff choosing either to opt out or to stay at the lower level of contribution.

The success of auto-enrolment is a crucial test of an attitude of mind as much as anything else. Steve Webb, the pensions minister in the Coalition who piloted the legislation through parliament, has called it “a social and economic experiment on a scale barely without equal across government” and that is no exaggeration. This is a far-reaching measure, on a par with the introduction of the state pension by David Lloyd George in 1909.

It is, in fact, the first attempt to force people to save since the National Insurance Fund was established after the Second World War. This was supposed to be a ring-fenced pot into which we all paid part of our income, topped up by employer contributions, to help us when we were in need.

Many people still believe their NICS are being invested for their retirement, when in reality the money is used to finance current social spending. As the post-war Labour minister Aneurin Bevan said: “The great secret about the National Insurance Fund is that there ain’t no fund.”

It was plundered because too much government policy is short-termist and designed to get through to the next election. Auto-enrolment, by contrast, is a truly long-term initiative, one that will not impact on the lives of today’s twentysomethings just starting out in work, for 50 years.

But getting people to focus on that faraway prospect was never going to be easy and with the increase in contributions it is about to become a lot harder. For those on low incomes, it will mean forgoing hundreds of pounds a year. The other day I heard someone interviewed on the radio saying she would probably opt out. “I want to be able to afford my holidays,” she said. “A pension seems so far off.”

Indeed it does; and the idea of deferring today’s pleasures for tomorrow’s necessities is hard to get across in a consumerist society underpinned by a belief that the government is always there to provide a safety net for the feckless. Sooner or later, however, it won’t be.

There are several factors working in favour of sustaining the numbers in auto-enrolled schemes. One is apathy: once in, the inclination is to stay in since leaving means taking some sort of positive action. That was the somewhat cynical “nudge” thinking behind the idea in the first place. Second is the fact that the employer also pays in so those opting out will lose that money and the tax relief that goes with their contribution. Furthermore, the national minimum wage is about to go up so with real incomes growing again the impact may be cushioned.

No one pretends that these relatively small contributions will produce a fortune and some economists want the Government to junk the pensions model entirely and introduce new forms of saving like super-isas topped up by the state and locked until retirement.

Auto-enrolment was designed for those who might never have joined a pension. Those of us who have long paid into pensions, but don’t have the gold-plated returns enjoyed by the ministers and civil servants who decide what should happen to our savings, have cause to resent the way the UK’S system has been wrecked by successive chancellors.

Pensions are too often seen as tempting reservoirs of cash to be tapped by governments to fund free stuff now rather than an essential barrier against penury decades hence. We are in the midst of a profound and daunting demographic challenge that is changing the nature of retirement and will put intolerable pressure on the national finances.

By one estimate, we would need to spend an additional £10 billion for every one million people over working age to keep state benefits at today’s average levels; and that does not include the spiralling costs of health or social care. With too many people saving too little for their retirement, it is essential that the auto-enrolment experiment does not crash at the first big hurdle. And this is just the start. The future costs of health and care will have to be shared by the state and individuals – which means the next big policy ambition must be to create new insurance-based financial products to provide long-term care financing.