27 June 2018
...but what should policy makers do to make sure the tree continues to grow strongly?
Since 2015, when small and then micro employers were first required to enrol eligible employees into a pension the number of people saving into a UK pension has jumped. By April 2018, 9.6 million people or 84% of the eligible population were saving into a UK pension. This compares to 77% a year previously – according to the latest Workplace Pension Participation and Savings Trends statistics, which cover 2007-2017.
As a result, there has been a £4.3 billion rise in the amount saved into workplace pensions, to £90.3 billion in 2017. These are all promising signs for the future, and with the increase in auto-enrolment contribution rates set to continue we can hope to see even greater amounts being saved from 2018 onwards.
The success of auto-enrolment has been due in no small part to the effect of inertia. So long as people don’t have to take difficult decisions or ‘engage’ with the complex subject of retirement provision, they are likely to stick with the status quo.
The data also showed that only 1% of eligible employees are not saving “persistently” in that they have not saved into a workplace pension in at least three out of the previous four years. The real test will come when the 2018 data is published – revealing the level of opt-outs from April 2018 when the minimum auto-enrolment rate increased from 2% to 5% of relevant earnings; and the following year when the rate rises again, to 8%.
After that, the challenges will be how to increase coverage and contribution levels such that the amounts saved will be sufficient to make a real difference in retirement.
The 2017 review of auto-enrolment made a good start by recommending a reduction in the minimum qualifying age to 18 and that contributions should be based on full earnings, not just those over a lower earnings level (£5,876 in 2017/18). But, in the longer term, more needs to be done - it is generally accepted that, going forward, pension savings need to be nearer 16% of earnings than 8%.
There are many ways of “nudging” people to increase the amounts they save for retirement. These include: targeted tax incentives, auto-escalation and greater financial education but none of these is likely on its own to lead to a wholesale increase in retirement saving levels.
Ultimately, as suggested previously, the UK may need to decide that saving for retirement becomes compulsory. In Australia, such saving has been compulsory for more than 25 years and the UK can learn valuable lessons from the Australian experience, including the benefits of clear, simple communication. Australians have far more intimate knowledge of the value of their savings, as well as where they are invested, showing that compulsion and simplification go hand-in-hand with engagement.
That is why the work of Ruston Smith, Quietroom and others in designing the Universal Retirement Income Statement as part of the 2017 review of auto-enrolment is so valuable.
It’s straightforward really - increase coverage, simplify messaging, and gradually raise contribution rates without causing hardship – in order to give those who have little or no defined benefit pension provision the prospect of a comfortable retirement.