Commenting on the ONS pension figures released today, Chris Noon, Partner at Hymans Robertson, the independent pensions, benefits and risk consultancy said:
“It’s great to see scheme pension scheme membership on the rise – this is largely due to auto-enrolment. These figures show that, thus far, auto-enrolment seems to be working and is taking us in the right direction, which is good news. With over 90% of employees choosing not to 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. However, even when contribution levels increase to 8%, auto-enrolment will not be enough to provide an adequate level of retirement income. This has been exacerbated by the significant reductions in State Pension being introduced by the Government from April 2016.”
On the 20-29 year old group seeing the biggest rise in membership, he added:
“We’ve analysed the behaviours of over 360,000 employees in defined contribution (DC) pension schemes of blue-chip employers. Across the 20 to 29 year old age category, our dataset shows that 31% of this population is not saving enough to meet the minimum retirement income thresholds. On average, savings rates for individuals in their 20s and 30s should be around 15% of total pay which is twice the auto-enrolment minimum levels.
“For 20-29 year olds, the average total contribution is 5%. Hopefully the new pension freedoms from April 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.
“Our research has shown that 20-29 year olds will be in much better shape than those age 30-39 when they reach retirement. This is because they are younger, they will benefit from auto-enrolment for longer. Worryingly, 52% of 30-39 year olds are off track and they have less time to get back on track. This underlines the importance of saving into pensions from an early age.”
Commenting on the fact defined benefit (DB) pensions schemes represented less than half (49%) of total workplace pension membership in 2014, for the first time since the series began in 1997, he said:
“It’s interesting that we’ve reached a tipping point for the shift from DB to DC, with more people being members of DC schemes than DB plan. It’s worth noting, however, that the process of automatically enrolling people into pensions isn’t complete. There are still many SMEs who haven’t been through this yet so we could see this figure increase further over the next couple of years.
“However, the tipping point for a shift in assets is still some way off. With UK private sector defined benefit liabilities equivalent to one year’s UK GDP, with assets well in excess of £1tn, even with the advent of the pension freedoms, which could see a steady flow of DB benefits in to the DC world, it will be many, many years until DB savings are overtaken by DC. It would take a significant event, such as a huge boost to DC savings through automatic escalation of contributions, to change that.
“For DB schemes there is still a long route to settlement that needs to be mapped. Schemes need to hold a steady course, navigating near term risks and opportunities, such as the pension flexibilities and the anticipated revolution in the risk transfer markets this year.”
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