The number of employees that are ineligible for automatic enrolment has been growing at a “rapid rate”, overtaking the number of employees that are eligible, research from the Pensions Policy Institute (PPI) has found.

The research revealed that, by June 2024, 11.1 million employees were automatically enrolled, while the number of employees found ineligible for automatic enrolment because of age or earnings has also continued to grow, and, at 11.2 million, is now more than the number of employees who have been found eligible.

The PPI clarified, however, as these automatic enrolment statistics are cumulative and employees’ eligibility is assessed each time they join a new employer, the number found ineligible is increased by people who move jobs more frequently, or who are more likely to be ineligible due to age or earnings, such as younger workers and those on low incomes who are more likely to be in less secure employment on average.

Despite this, it argued that further reforms may still be needed if more people are to be brought into pension saving, noting that the former government had previously committed to implementing auto-enrolment reforms designed to extend the scheme to younger workers and lower earners.

However, the PPI suggested that changes to contribution amounts may also be needed, after its research found that the average employee and employer contributions have stagnated around the minimum mandated rate, despite the fact that minimum contribution rates are unlikely to deliver adequate and sustainable retirement outcomes

According to the report, while those who were already members of workplace pensions prior to the introduction of automatic enrolment for the most part continued contributing at the same rates, large numbers of new savers contributing at minimum rates reduced the average contribution level.

With no further increases currently planned for minimum contribution rates, average employee contribution rates have therefore stagnated at 4 per cent in trust-based DC schemes and have seen only a very small uplift of 0.1 percentage point to 4.1 per cent in Group Personal Pensions (GPP).

In addition to contribution rates, the PPI acknowledged that returns achieved through scheme investment also impacts DC members’ pot sizes at retirement, and, as a result, the adequacy of their retirement outcomes.

Indeed, PPI policy researcher, Shantel Okello, acknowledged that the pensions industry and regulators are increasingly focused on improving investments to enhance DC member outcomes, with a particular focus on investments in the UK economy.

"While initial efforts concentrated on cost efficiency post-automatic enrolment, there is a gradual shift from traditional equity and bond portfolios to alternative assets, including illiquids and private markets," she stated.

"Issues around access to assets and scheme size could be holding some schemes back from further developing their investment strategies, however the future is likely to result in a fewer number of DC schemes, with remaining schemes holding higher asset and member values, making further diversification easier."

However, the PPI argued that how a focus on benefiting the UK economy aligns with schemes’ duties to act in the best interests of their members is a "central concern".

Another critical issue highlighted by the PPI was the long-term political, economic, and systemic consequences of allowing the government to direct pension scheme investments.

Indeed, the PPI's report warned that government influence over pension investments could have "far-reaching" implications, including potential conflicts of interest and reduced autonomy for pension schemes

Additionally, it said that there are questions about how increased investment in UK private equity will affect scheme returns and member retirement incomes, as the PPI noted that while private equity investments offer the potential for higher returns, they also come with higher risks and potential volatility.

“Government calls for higher investment in private equity and other productive assets are likely to result in greater use of private markets," Okello said.

"These moves will need to be carefully handled in order to ensure that schemes still put the needs of their members at the forefront and that market supply issues don’t cause scarcity.”

Commenting on the report more broadly, Okello said: "The past decade has seen remarkable shifts in the DC pensions landscape, with increased individual responsibility and exposure to risk.

"As we look forward, it is becoming increasingly important to develop policies and strategies that support members in navigating these changes and securing positive retirement outcomes. Technological advancements and innovative investment approaches will play a key role in shaping the future pensions landscape.

"DC members now bear greater responsibility for their retirement security and are put in a position where they need to make decisions about accessing pension savings which will significantly affect their retirements.”

“As a result, efforts to mitigate risks associated with DC saving and access are intensifying.

"Policy changes such as the Value for Money Framework, pensions dashboard, and small pot consolidator models aim to address inefficiencies within DC pensions but each of these initiatives places an onus on industry to adapt and develop, which must be supported by government, while ensuring costs for members don’t rise unduly.”

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