The concept of employees needing to opt out of saving for their old age, rather than opt in, is indeed a revolutionary one. But although the blandly named "automatic enrolment" scheme that starts today is being heralded by many as the biggest shake-up of the pensions system since Lloyd George set it up, in practice the reforms will make only the smallest dent in Britain's impending pensioner poverty crisis.
No one disputes that a painful crunch is coming. Fewer than half of working adults are enrolled in a pension scheme, leaving the majority looking forward to a retirement with nothing but meagre state support. Among the poorly paid, the proportion is lower still: less than a quarter of those earning under £14,000 per year are putting money aside for old age. Meanwhile, longer life expectancies are adding decades to retirement, and the pressure on the public purse is only increasing.
Faced with the grim prospect of large numbers of the elderly without enough money to live on, automatic enrolment is no bad place to start. As of yesterday, all staff working for larger businesses will – unless they specify otherwise – see a percentage of their salary diverted into a pension, with tax relief and a contribution from their employer on top. With similar arrangements to be phased in at smaller companies over the next few years, millions could soon be enrolled in a pension for the first time – and in a position to buy themselves an annuity at the age of 55 or above as a result.
So far, so good. Any plan to increase the number of people with long-term savings can only be welcome, particularly one which will bring in traditionally hard-to-reach groups such as younger and lower-paid workers. Here, however, the revolution rather runs out of steam.
First, and most obviously, are the raw numbers. Because most people are understandably loath to part with a chunk of their monthly pay – even with the prospect of "free" money from their employer as an incentive – contribution levels for the automatic enrolment scheme have been set low. More people may well stay on board as a consequence, but such spare investments will only produce a correspondingly sparse retirement income.
Back-of-the-envelope calculations suggest that a lifetime of payments at the top rate of 4 per cent, boosted to 8 per cent by the employer and the state, might buy an annuity of a few thousand pounds – hardly enough for the "comfortable" living for which policymakers are aiming. Indeed, by way of comparison, it is worth noting that old-style, "gold-plated" final-salary schemes typically took in contributions at around 20 per cent of earnings.
Second, and barely less of an issue, is the question of predictability. It is, of course, sensible to foster a culture of planning for retirement. Simply enrolling more people in a defined contribution pension, however, will not help much. With annual payouts unrelated to final salary levels, and dependent less on the amount paid in than on stock market fluctuations and the vagaries of annuity rates, future income levels can only ever be guessed at.
For all that automatic enrolment is the "game changer" its proponents claim, Britain's broken pension system remains far from fixed. True, more people will have more retirement income than otherwise. But millions will still not have enough, nor will they be in a position to plan their affairs with any certainty. To remedy the situation requires more tough choices, on everything from the state pension to the retirement age. Yesterday's reforms are a step forward; but they are still just a single step on a very long road.