In line with our risk management framework, today we published our Q4 2019 performance update.
Is auto-enrolment having an impact on pension saving?
Until recently, the absence of a workplace pension was the norm for many employees in the UK. It was almost luck of the draw, and, as a result, the ongoing issue of whether Brits are saving enough for retirement has been brought into question.
Although there is a long line of research over the years with varying perspectives, perhaps that which best typified the lack of reserves regarding retirement planning was a study conducted earlier this year by Prudential, which found that 11 per cent of those due to retire in 2017 expect to be either solely or largely reliant on the state pension during their golden years, with one in seven holding no savings whatsoever.
This resonates with our own recent survey, which found that 34 per cent of non-retired adults in the UK aren’t putting a single penny towards retirement each month. Furthermore, 22 per cent of respondents from the same sample felt they would never be in a position to fully retire from work.
Such findings are the kind to set alarm bells ringing, and it was with similar sentiment in mind that Government decided to take action. Under the Pensions Act 2008, it is now mandatory for employers to enrol eligible staff into a pension scheme, and to contribute towards it. Employees may voluntarily opt out of this scheme if they wish, and later re-join too. But, as a default setting, these workers are required to pay in a minimum of 0.8 per cent of qualifying earnings into their workplace pension (rising to 2 per cent in April 2018, and 4 per cent in April 2019), with an employer contribution of at least 1 per cent (rising to 2 per cent in April 2018 and 3 per cent in April 2019) to top this up.
Such legislation has been phased in over a number of years, with a deadline for implementation for employers of 1 February 2018. Yet, to date, many organisations have already put these frameworks in place, and enrolled their workers accordingly. And the early signs of its impact, particularly among younger Brits, are quite promising.
A warm response from the young
In a survey of 1,500 young savers by Royal London, it was found that 71 per cent of auto-enrolled workers have retained this status quo, with a further 8 per cent having opted out, and then opting back in again. The research also established that three quarters of savers aged 25-34 are content with increasing their savings levels proportionally with pay rises, with 40 per cent actually looking to increase payments into their pension in 2018.
Time will tell what impact the statutory increases to the minimums for both employer and worker contributions will have on opt outs, but the response to separate questions within the Royal London study was encouraging. Assuming employer contributions of 3 per cent and employee contributions of 5 per cent (which actually exceeds the planned increase to 4 per cent by April 2019), an impressive 62 per cent of survey participants said they would stay opted in.
State pension sustainability and the savings burden
Although the state pension is currently under a so-called ‘triple lock’ there is widespread concern about its sustainability given our ageing population. Back in 1970, the state pension consumed just 4 per cent of GDP. By 2015, this number had swelled to 9 per cent. While attempts to shed the expensive triple lock by the Conservatives as part of their election campaign have ultimately bitten the dust, the stark reality is that reform will be a necessity if the state pension is to continue to be feasible.
As we’ve seen recently, plans are now in place to increase the state pension age earlier than planned, and it is likely that, in pursuit of reducing the fiscal deficit, this trend of tightening the belt will continue for years to come. As such, millennials and those of a younger disposition simply cannot bank on the state pension to tide them over in retirement. Furthermore, in these uncertain economic times, taking matters into one’s own hands when it comes to retirement planning is all the more paramount.
For now, all we have to go on is literature such as that provided by Royal London, and the proof will be in the pudding over the coming years and decades. But early signs are that auto-enrolment is having the intended effect, and, more importantly, that the younger generations are grasping the importance of pensions and financial planning. Should such attitudes continue to endure, the doom-mongers can be kept at bay, and a prosperous, secure retirement will lie ahead for many of today’s young Britons.
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