Empowering everyone to save for retirement

Pensions targets

Need to know:

  • The introduction of the new state pension could have implications for what support employers offer and how they communicate this.
  • Although auto-enrolment and the new state pension go some way to reducing inequality in pension provision, there is still much more to be done.
  • Employer matching and auto-escalation could encourage greater employee engagement with retirement savings.

Auto-enrolment and the new state pension will help reduce inequality in pension provision, but there is much more to be done, according to the Pensions Policy Institute (PPI), the non-political pension education charity.

In March 2016, the PPI published its The under-pensioned 2016 report, exploring differences in pension income between the sexes, disabled people and ethnic minority groups over the last two decades.

The study found that once the new state pension has been fully phased in there will no longer be significant differences in state pension income between these different groups. However, some cohorts will continue to have much lower private pension saving, largely because of labour-market characteristics such as low pay, part-time working, caring responsibilities, self-employment, and unemployment.

Chris Curry, director at the PPI, says: “We have seen a real improvement for all groups over time, and the new state pension system will have a really positive impact.

“Its introduction in April [2016] may also have implications for employers, what they offer to employees and how they communicate it. The single flat-rate pension will be more generous for older, lower-income workers than the old system, and less generous for higher-paid employees and younger workers. But by providing a firmer foundation on which to build private pension saving, the benefits of saving should be easier to communicate.”

The new system is based on the number of years that national insurance (NI) has been paid, regardless of how much someone has earned, with a full state pension paid for 35 years of contributions.

People with less than 10 years of NI contributions will not be able to claim. However, Curry adds: “If someone has stayed within the UK for their full working life, then it is hard not to qualify because there are credits for childcare, disability and unemployment.”

Much has been said about the impact on people who have been contracted out of the state pension in their employer’s scheme but they will not be worse off than if the current system had continued, and they may be able to build up additional years to qualify for a full state pension, says Curry.

Curry is also optimistic about auto-enrolment, pointing out that it has enfranchised large numbers of employees who previously were not saving for retirement. Yet, there are still gaps where employees are too young or old, or do not earn enough to meet the enrolment threshold, and they continue to miss out on employer contributions and tax relief.

Critics have often made the case that auto-enrolment simply encourages the less well off to lift themselves off means-tested benefits. However, under the options available through the pension freedoms introduced in April 2015, defined contribution (DC) pension pots can now be taken as cash.

“It is unclear how means-testing is likely to work in practice,” says Curry. “There have always been measures that if a person has a source of income then they will be deemed to have taken it, but it is not clear how that will work in practice.

“The key issue is that while defined contribution arrangements provide more flexibility, such as to work part-time or downsize, the amount going in is pretty low compared to what is needed.”

Around 14% of band earnings is required across a whole working career to have a two-thirds chance of generating an adequate pension, defined as one where the pensioner’s standard of living will not drop.

Whether the government will raise the contribution levels is something that might be addressed in the 2017 review of auto-enrolment.

“One of the big unknowns is how the industry can overcome apathy and engage people,” adds Curry. “There are good examples of strategies that work with human behaviour to encourage people to act in a beneficial way.”

Auto-escalation, where employees agree to automatic increases in their contributions at the time of their annual pay rise, has enjoyed success in the US, as has matching, where the employer promises to match any additional contributions made by employees.

“Showing employees what their peers are saving can also be a powerful tool, giving people a feeling of safety and making them happier to take action,” says Curry.