IT HAS been lauded as a success story for the coalition government and a quietly radical way to get more people saving for their future.

But questions are now being raised about whether auto-enrolment, the initiative that has pushed millions into default pension schemes, is forcing young and low-paid workers to give up vital pay to fund an inadequate retirement.

Full-time employees will have to put more of their salary into their workplace pension from next year, with the minimum contribution rate rising to five per cent by 2018.

But it is feared that the increased allocation to pension will lead staff, who are wrestling with rising inflation and flat salaries, to start leaving these defined contribution schemes, with the pensions industry and employers being urged to provide more choice, information and flexibility if they want to avoid a backlash against the policy.

Companies like PwC are already giving staff alternative options to a pension contribution, with a senior figure at the firm admitting that pensions “might not be the right thing for everyone”.

Saq Hussain, director of workplace savings and benefits at PwC, the biggest employer of graduates in the UK, said employers would have to be more “agnostic” and give workers greater freedom to decide what to do with their money.

Speaking at the Pension and Lifetime Savings Association (PLSA)conference in Manchester last week, Mr Hussain said: “Rather than trying to force people to pay into a pension, employers might be better off getting them to pay down debts. We need to stop using the word pension and help millennials with the broader financial journey through life.”

British Airways has also mooted the idea of giving its 17,000 staff the option to take the employer’s contribution in cash as a pay rise after it closes the larger of its two final salary pension schemes to future accruals.

Other voices have also asked whether auto-enrolment has been forced through without regard for young workers’ financial problems.

Independent pensions consultant John Ralfe said auto-enrolment was “not a proper choice”, saying people were being deprived the opportunity to pay down expensive debt and secure their future prosperity because their cash was being diverted into a pension scheme.

He said: “The lower-paid certainly should be saving to top up their state pension, but does it make sense for them to be saving into a pension?

“Should they opt out of auto-enrolment and use their monthly pension contribution, including the company contribution, to pay down debt, starting with the highest interest rate, usually expensive credit card debt? Paying off debt is saving so at retirement, net savings…will be higher than putting the same amount in a pension.”

Such alarm bells were at odds with the upbeat tone adopted by many auto-enrolment champions at the PLSA conference. Jamie Jenkins, head of pensions strategy at Standard Life Aberdeen, told the conference that auto-enrolment had been a “roaring success” with 8.7 million workers enrolled since launch in 2012.

Mr Jenkins, an adviser to the Government on auto-enrolment, acknowledged that there had been a build-up of personal debt and that “affordability is a key issue”, but went on: “Equally there is a question of priority. We don’t at the moment place saving for the long term above quite a number of other things in our lives.”

David Finch, senior economic analyst at the Resolution Foundation, said millennials were “falling behind” compared with previous generations at the same age, and demographic change would put “a greater burden on their incomes and living standards”.

He added: “Millennials are saving more than others but the big test is when auto-enrolment contribution rates start to rise, and it becomes a bigger chunk of their income going out and they have to weigh it against other things.”

Matters have not been helped by conflicting reports of how much millennials are actually saving, both in and outside a pension. A survey by Close Brothers, heavily publicised at the PLSA conference, found millennials were saving more than any other group, putting away on average £286 a month. The average young worker also said they had £15,000 in their pension.

But research for the Government’s review of auto-enrolment found that 40 per cent of workers have savings of less than £100, and official statistics have also found that half of all millennials believe their net wealth is £700 or less.

The new pensions minister, Guy Opperman, told the PLSA that he will report to Parliament on the results of a much-awaited review into auto enrolment at the beginning of December.