Have you ever wondered how to motivate someone to take action? One effective method is to remove the option of inaction. This concept lies at the heart of the auto-enrolment system.

The initiative has been viewed as a significant advancement, and in certain aspects, it certainly is. Recent figures from the Department for Work and Pensions indicate that contributions to workplace pensions saw an increase of £28 billion from 2012 to 2020.

However, despite this success, there are concerns that auto-enrolment could lead to substantial savings crises if it is not approached with caution. Here’s why.

The purpose of auto-enrolment was to encourage employees to save for retirement. Starting in 2012, it ensured that the majority of private sector workers, aged 22 and earning over £10,000 annually, were automatically signed up for their employer’s pension scheme.

There’s no need to deal with complex forms or to proactively opt-in; simply starting a job means you automatically have a pension.

While the initiative has facilitated employee savings for retirement, it has simultaneously allowed employers to reduce their contributions.

Defined benefit (DB) pension plans, which guarantee an inflation-protected income throughout retirement based on salary and years of service, were once commonplace in the private sector. The costs associated with these plans have caused a significant decline in their prevalence, along with reduced employer contributions.

In 2011, prior to the introduction of auto-enrolment, employers were contributing an average of 14.2 percent of an employee’s salary to DB pension schemes, according to the Office for National Statistics.

Currently, employers are only required to contribute a mere 3 percent to auto-enrolment defined contribution (DC) schemes, where retirement income depends on individual contributions and investment performance. In contrast, employees must contribute at least 5 percent.

In just the past three years, employer contributions to employee pensions have plunged by 16 percent—30 percent when adjusted for inflation—reported the Financial Times last week.

This declining trend is anticipated to persist following the rise in the employer national insurance rate from 13.8 percent to 15 percent this month, as many companies find it challenging to provide anything beyond the minimum contribution.

The crucial issue is that a significant number of employees are unaware that their workplace pension plans may fall short.

Auto-enrolment has falsely reassured many that their retirement savings are sufficient, when in fact they may not be. Research from the Institute for Fiscal Studies (IFS) indicates that approximately 30 to 40 percent of private sector employees (around 5 to 7 million individuals) enrolled in DC pension schemes are on track for retirement incomes that will likely be inadequate.

While the rate of opting out of auto-enrolment remains low, the initiative has not fostered an engaged generation of savers. The majority lack interest in their pension situation, as seen by the high percentage of savers invested in their pension provider’s default fund. Moreover, fewer than half of private sector employees contribute above the minimum required amount, according to the IFS.

It’s important to recognize that being automatically enrolled in a pension does not guarantee financial readiness for retirement. Similarly, a default contribution rate should not be mistaken for an ideal rate.

To ensure adequate retirement incomes, both employer and employee contributions need to increase. While this may not be the most comforting news, it is critical to face reality to prevent a looming retirement crisis.