Has auto enrolment made the UK better prepared for retirement?
Auto enrolment celebrated its fourth birthday in 2016. It was created to make sure Britons save enough money to fund their retirements with tax savings to be made along the way. Importantly for many, it means capitalising on employer contributions to boost their retirement pots.
2016 has seen many smaller employers ‘stage’ (the point where the business needs to provide a Qualifying Workplace Pension Scheme as determined by The Pensions Regulator) so many more employees have been swept up. This means some people are now paying into a pension for the first time.
Recent reviews have suggested that although the initial auto enrolment surge was successful, there are doubts about whether the next wave of employees are willing or able to save as much as they need to save for their retirement, so is auto enrolment missing the point? Is it more about being able to save than understanding pensions?
Recent research by Scottish Widows has revealed the number of people saving adequately for retirement has remained static this year, for the first time since auto enrolment was introduced.
From the beginning of automatic enrolment in late 2012 to 2015, the percentage of people saving adequately for retirement in to a defined contribution scheme rose from 45 per cent to 56 per cent.
However, in 2016 it remained at 56 per cent.
Scottish Widows predicts that this flat trend will continue, citing research that found 58 per cent of people believed they wouldn’t be able to save any more in the next 12 months than they do now.
Is inflation going to make things tougher?
Inflation (measured by CPI) hit 0.6% in August , rising from its time at 0% throughout most of 2015. If people find they have less disposable income at the end of the month, saving into retirement could suffer. In a survey carried out by Aegon, high living costs, mortgage repayments and family commitments are preventing people from saving more, according to 92% of 45 to 49-year-olds and 89% of 50 to 65-year-olds.
In the generation before, one in three (33%) 35 to 39-year-olds have no pension cash saved, despite approaching the mid-point of their working lives, according to Zurich.
The figure equates to 1.3 million Britons in the age group not having saved for their later years if the findings were projected across the country.
Meanwhile, 37% of 25 to 34-year-olds who took part in the same survey by YouGov also said they are not saving into a pension – equating to about 3.2 million people.
Replicating the golden age of pensions
The good news is to be found in the generation now entering retirement, described as a ‘golden age of pensions’ by Aegon’s Pensions Director, Steven Cameron.
Aegon found pension incomes have risen from £155 a week in 1995 to £297 in 2015 – largely due to above-inflation increases in the State Pension and “generous” defined benefit (DB) schemes.
The government has recognised the problems, but insists auto enrolment is working for employees.
Minister for Pensions, Richard Harrington has welcomed the news, calling it a fantastic achievement for both employees and employers:
“I want to congratulate everyone who has already made automatic enrolment such a success. It is clear we are helping to create a culture of saving, giving people a much-needed boost to their pensions, and the important work on roll-out continues.
“My mission is to ensure everyone has the opportunity to benefit from a workplace pension. For some people, this may be the first time they have saved in this way, and we must help them build a big enough savings pot so they can enjoy a comfortable retirement.”
This sounds like there might be more stick than carrot coming the way of savers in the early and mid-part of their working lives, although it is unlikely to be a popular measure for those who feel they simply can’t afford it.