The Pensions Policy Institute has published 'How will automatic enrolment affect pension saving?', a report that analyses the potential effects that employee and employer responses to automatic enrolment could have on scheme membership and the total value of assets in private sector workplace pension schemes.
The research finds that the vast majority of new private sector pension savers arising from automatic enrolment are likely to be saving in Defined Contribution (DC) workplace pension schemes.
Decisions made by employees will impact the level of savings which result from automatic enrolment. The current rate of opt-out is around 9-10% on average, but this could grow as small to medium sized employers start to automatically enrol their employees and as minimum employee contributions rise.
If the opt-out rate from automatic enrolment stays at 9%, 8.5 million people could be newly saving in a pension by 2030 and there could be 15 million people actively saving into private sector workplace pension schemes in total, the vast majority of these in DC schemes. However, if opt out rates rise to 25%, there might only be 6.5 million new savers in 2030, out of a total of 13 million private sector workplace pension active savers.
Under these different opt out scenarios, by 2030 the value of assets in private sector DC workplace pension schemes could range between £455 billion and £495 billion (2014 earnings terms) compared to around £350 billion without automatic enrolment. The value of total private sector workplace DC assets in the UK could become greater than the total value of private sector workplace DB assets in around 2036.
The research finds that the decisions employers make regarding contributions will also affect levels of private sector workplace pension saving. Many employers with existing provision are currently automatically enrolling their employees into their existing schemes and paying contributions at levels higher than the minimum required under automatic enrolment regulations. However, many employers without existing provision have stated their intention to automatically enrol their employees on minimum required contributions.
Daniela Silcock, Senior Policy Researcher said “This research shows that DC pensions will play a much greater role in private sector pension saving in future, though the decisions made by employers and employees will affect the total scale of saving and the value of assets in schemes. Based on reasonable assumptions about opt out rates, we could see up to 15 million people actively saving in private sector workplace schemes by 2030, with up to 8.5 million of these newly saving, and up to £495 billion in DC assets. This is a phenomenal change to the pensions landscape when you consider that without automatic enrolment there might be around 6 million DC savers and £350 billion in DC assets by 2030.”
“The current opt-out rate of 9%-10% has exceeded expectations, however it is worth reflecting that larger employers, who are more likely to have existing provision and extensive HR and admin support structures around pension saving, have just completed their staging dates. Small to medium sized employers will be reaching their staging dates over the next few years, and it will be important that these employers are given the support necessary to fulfil their duties and that employees for whom pension saving might be beneficial are not encouraged to opt-out.”
“A vast number of people will reach State Pension Age with DC pension savings in the future. Alongside this the Government is introducing greater flexibilities in accessing DC pension savings from 2015. As a result, the way people take and use workplace pension savings in retirement is likely to look very different in the future from how it looks today. Forthcoming PPI research will look in further depth at how transitions to retirement and the use of pension saving in retirement might look in future.”
Nigel Wilson, Group Chief Executive of Legal & General Group Plc said “Auto-enrolment is a tremendous success, and shows what can be achieved when the government, regulator and the industry engage in deep collaboration. People though do need to make higher contributions and retire later, if they are to achieve the retirement income they desire.”
“PPI has a great reputation for being at the forefront of pensions thinking. Today’s report shows a massive growth in Defined Contribution Savings with up to 15 million people actively saving by 2030. This is great news for the individuals and the country, and supports our own conclusions and strategic direction for the Defined Contribution market”
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