Lovewell’s logic: Mind the (contribution) gap

Debbie Lovewell-Tuck

Figures from the Office for National Statistics (ONS), published earlier this week, showed that membership of workplace pensions has reached record levels since the launch of auto-enrolment; just under three-quarters (73%) of employees contributed to a workplace pension in 2017, compared to less than 47% in 2012.

According to the ONS’ figures, this equates to approximately 9.5m people having been enrolled into a workplace pension since 2012.

More specifically, this has led to a rise in the proportion of employees belonging to defined contribution (DC) schemes, which has increased from 17% in 2012 to 43% in 2017.

But, contrary to the expectations of many outside of the pensions industry, this does not mean that the UK population is better prepared for retirement. While it is undoubtedly positive that more individuals are saving, the ONS’ figures also show that few are accruing enough to fund a sufficient level of income following retirement. Many are contributing at, or close to, minimum levels required under auto-enrolment legislation.

Research published by PensionBee this week, meanwhile, found that there are considerable differences in the level of contributions made by individuals, depending on the region in which they are based. Those in Northern Ireland, for example, make the highest monthly net contribution at £310 per month, while those in the east midlands contribute the least, putting in £98 per month.

Differences in the cost of living, among other factors, however, mean that it is not necessarily those that currently contribute the most that will receive the highest annual pension payments in retirement.

Despite making the lowest monthly contributions, individuals in the east midlands can expect to receive a replacement income in retirement worth 33% of the average salary in that region. Those in Greater London, meanwhile, who contribute a monthly net average of £227, can typically expect to receive a replacement retirement income worth 22% of average salary.

This brings us back to the age-old question: how can we encourage employees to save enough to live comfortably in retirement?

Should education be given to help people understand that it is not just contribution levels that will dictate their retirement income, but that other factors can influence it in various ways?

If so, who should be responsible for delivering this education?

These are questions some forward-thinking employers are already addressing; however, more need to do so if the UK population is to overcome the so-called ‘pensions time-bomb’.

Debbie Lovewell-Tuck
Tweet: @DebbieLovewell