Around 8.5 million people could become new pension savers by 2030 if auto-enrolment opt-out rates remain around 9-10%, according to research by the Pensions Policy Institute (PPI).
The report, How will automatic enrolment affect pension saving?, which was sponsored by Legal and General, analysed data provided by auto-enrolment pension scheme providers and consultants, as well as the Department for Work and Pensions.
Using various auto-enrolment opt-out scenarios, the PPI estimates that there might only be 6.5 million new pension savers in 2030 if opt-out rates rise to 25%, and that the value of assets in private sector defined contribution (DC) workplace pension schemes could range from between £455 billion to £495 billion, in 2014 earnings terms, compared with around £350 billion without auto-enrolment.
The report also found that the value of total private sector workplace DC assets in the UK could become greater than the total value of private sector workplace defined benefit assets by around 2036.
Daniela Silcock (pictured), senior policy researcher at the Pensions Policy Institute, 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.
“The current opt-out rate of 9-10% has exceeded expectations. However, it is worth reflecting that larger employers, which are more likely to have existing provision and extensive HR and administration support structures around pension saving, have just completed their [auto-enrolment] 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.”
There can be no doubt that automatic enrolment will get more people saving more for their retirement and, with up to 14.5 million people saving into DC schemes by 2030, it is important that people are saving in good quality schemes.
The report highlights that perceptions of value for money and affordability will be crucial to the long-term success of auto-enrolment, so we need to ensure schemes have transparent and low charges and meet standards of good quality. Savers will be looking on the industry to provide pensions that are good value and have clear charges, they want pensions they can trust.
The PPI’s latest report demonstrates the very positive impact that auto-enrolment is having on getting people into pension saving for the first time. Even on the PPI’s most pessimistic estimates of future opt-outs, the stage seems set for pension saving to become the norm. Given the need to support modern society as it continues to live longer in retirement, these figures must be welcomed.
By incorporating the new obligations into their standard pension offering, rather than treating auto-enrolment purely as a compliance exercise, employers can help individuals get on board with the concept of saving for their retirement. An important lesson that SMEs in the run-up to their staging date can take away from the early stagers is that member engagement is key to ensuring the potential value of pension saving is fully understood. The more individuals can identify with the need to provide for their later life, the lower the opt-out rates are likely to be.
While there is no doubt that the flexibility afforded by the 2014 Budget will lead to fewer individuals buying annuities, the success of auto-enrolment could be the lifeline that insurance providers and the wider annuity market are looking for. The PPI’s report is promising in that it shows that the number of individuals saving into a DC pension could double by 2030. Even though a lower proportion of individuals might choose to annuitise their pot, there will likely be a far greater ‘pool’ of pension pots that could potentially choose to purchase an annuity. It may be attractive to draw everything from a pension pot out at once, but there will always be those who are attracted to the promise of a guaranteed life-long income.
It is still early days since the Budget announcement earlier this year, but already insurers themselves are coming back fighting; by developing a raft of new products to meet changing retirement needs, such as fixed-term annuities, surrenderable annuities and drawdown products.