Over the past 12 years auto-enrolment has significantly increased the number of people saving for retirement, and has helped to soften the great transition from the defined benefit era to our current defined contribution-dominated pensions model.
But enough of the backslapping. The vast majority of people are still currently under-saving, so what else can be done to help them secure their expected standard of living in retirement?
The new government outlined a series of measures within the pension schemes bill, referenced in the King’s Speech, aimed at improving outcomes for savers including tackling the growth of numerous small pots and focusing on value for money within schemes.
The bill is a welcome step towards ensuring people are investing in products that work for them and together with the focus on how pensions are invested contained within the government’s Pensions Review could also help to boost growth in the UK economy.
These measures, along with upcoming rollout of pensions dashboards, should help to boost transparency around people’s retirement savings, leading to better understanding and engagement levels.
However, there was no mention AE in the bill, which is the mechanism by which the vast majority of people save. It is good to see the new government include savings adequacy in the second part of their Pensions Review, and we hope to see AE reform feature heavily.
The single biggest lever we can pull to boost savings adequacy is to increase minimum AE contributions.
The current 8 per cent (5 per cent employee/3 per cent employer) minimum rate, in place since 2019, has enabled a balance between encouraging a level of saving and discouraging opt-outs, and high participation is one of the big successes of the scheme.
That being said, it was recognised at the time that 8 per cent was likely to be a low level for many and it was always hoped that most people would choose higher contributions if and when they could afford it. In reality, rates of saving into a workplace pension saving have stood relatively still and there’s little evidence to suggest people boost their contributions when they receive a pay rise or, for example, pay off their mortgage.
There are international examples of higher minimum contributions strengthening savings adequacy, for example in Australia where contributions will rise to 12 per cent next July.
In Australia, higher minimums along with other factors such as greater levels of investment in high growth-potential global private markets have led to people having a higher anticipated standard of living in retirement compared to the UK.
The level of savings future retirees will need is constantly changing and scattered with uncertainties – the number of people who will own their home when they retire in years to come, for example, is unknown and will have a big impact on required income.
Therefore, I would not want to discuss an ‘ideal’ level for minimum contributions. Instead, contributions should be raised incrementally as part of an ongoing review into savings adequacy, when economic conditions allow, and clearly there should be a pause if we see opt-outs increase.
