Automatic enrolment owes its success to the harnessing of inertia. Employees are, by default, enrolled into their employer’s pension scheme and contributions are automatically deducted and invested on their behalf.
However, in spite of its success in bringing so many employees into workplace pension saving, automatic enrolment is not on its own sufficient to guarantee optimal retirement outcomes. Ideally, employees should be actively engaged with retirement planning from an early age.
In an era where the vast majority of private sector workers are enrolled into a defined contribution (DC) pension scheme, it is vital that they have a realistic understanding of the contribution rates required to generate an adequate retirement fund. Currently, the statutory minimum contribution required of employees is just 1% of earnings over the £5,824 lower earnings threshold. In monetary terms this is trivial.
While statutory minimum rates are set to rise in coming years, it would be preferable for employees to understand from the outset that retirement saving is a significant financial commitment and are, therefore, prepared to budget accordingly.
With a liberalised regime governing the use of retirement savings, it is important that employees understand exactly what their options are. Ideally, they should be considering how they might use their savings and give thought as to when this is to happen. A growing problem in future years is the spectre of longevity risk; with annuities no longer a statutory requirement it is inevitable that some retirees will outlive their savings.
A workplace education programme that promotes effective engagement is the best way of ensuring that employees understand pension saving and are empowered to make informed decisions. Such a programme should start early in an employee’s working life.
A key aspect of effective engagement with workplace pensions is understanding that discussion of pensions is not just for those approaching retirement but is a topic to be addressed at all stages of a career.
Tim Middleton is technical consultant at the Pensions Management Institute (PMI)