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Over 90% of employees are choosing to stay enrolled in pensions after automatic enrolment
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The unknown is if opt out rates will increase in 2017 when contribution rates rise from current low level
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Even when contribution rates rise to 8%, this still won’t be sufficient to provide an adequate level of retirement income*
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Analysis comes from Hymans Robertson’s DC platform, GO, which has analysed the savings and characteristics of over 360,000 DC pension scheme members
Commenting, Paul Waters, Partner at Hymans Robertson, said:
“We’ve analysed the behaviours of over 360,000 employees in defined contribution (DC) pension schemes of blue-chip employers**. Across the 20 to 40 year old age category, our dataset shows that 41% of this population is not saving sufficiently to meet the minimum retirement income thresholds*.
“While this is a worry, thus far auto-enrolment seems to be working and is certainly taking us in the right direction. With over 90% of employees choosing to not opt-out, more people are saving for retirement. It will be interesting to see what happens when minimum auto-enrolment contributions increase from 2017. Our expectation is that many will continue to save into their pension.
“The bad news is, even when contribution levels increase to 8%, auto-enrolment will not be sufficient to provide an adequate level of retirement income (as measured by the Pension Commission). This has been exacerbated by the significant reductions in
State Pension being introduced by the Government from April 2016.
“Generally employees are reluctant to engage with pension decisions and tend to stick with defaults (typically those set by the employer/trustee) and in the majority of cases are not making the right decisions for them.
“On average, savings rates for individuals in their 20s and 30s should be around 15% of total pay which equates to twice the auto-enrolment minimum levels. Of the 41% of 20-40 years’ olds not saving enough, the average total contribution is 6%.
Hopefully with the new freedoms with pensions from April, this will help change the perception of pensions as poor value, and encourage younger generations to view their pension pots as another means of saving – and one that offers both great tax advantages and returns, particularly if your employer matches your contributions. Essentially that’s extra pay that you won’t get if you don’t invest in a pension.”
Hymans Robertson believes that savings priorities should be as follows:
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Pension saving to the extent their employer matches an individual’s contribution. Employers often provide at least £ for £ matching, giving individuals an immediate return of over 100% in tax efficient savings vehicle
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Debt repayment that involves high levels of interest charges. Interest rates on some forms of debt can exceed 30% pa. Paying down these debts is often a better investment decision than saving in other vehicles.
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Employer sponsored share plans. Sharesave/SAYE plans and other employer-sponsored share arrangements often come with employer match and/or substantial discounts to the market purchase price. They also offer excellent tax advantages
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ISA saving. ISAs offer similar tax advantages to pension for basic rate tax-payers but don’t have the inflexibility of pension saving where money can’t be accessed until age 55 (increasing to 57 in the late 2020s).
Concluding, Paul Waters said:
“It’s important that older generations encourage their younger family members to get into the savings habit early, helping them set up savings accounts such as pensions or ISAs as soon as possible. Employer facilitated savings vehicles such as DC pensions are typically the most effective starting point and should be used to their full advantage.”
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