Member Article

Auto-enrolment is a “start” says expert

Auto-enrolment begins on Monday, but the “millennial” generation will lose out to today’s pensioners, research from PwC suggests.

Analysis from the professional services firm has found that a 22 year-old woman who is auto-enrolled from Monday is likely to receive only a third of her final salary as a pension, unless she contributes significantly more than minimum requirements.

In today’s terms, its less than half the pension amount that her grandparents enjoy on a final salary scheme, despite having to pay into her pension for around 8 years longer.

If making the statutory minimum contributions, the case study woman can expect to receive a pension income, including a state pension, or around £18,000 a year, when she retires at 70. This equates to roughly a third of the £50,000 a year salary.

PwC calculates that the woman will need to contribute an extra 14% of her salary over the course of the next 48 years in order to have a similar pension to her grandfather, or an extra 4% to have a similar pension to her father.

Richard Podd, director in the pensions practice at PwC in Newcastle, said: “People entering work now are facing substantially lower pensions than their grandparents and parents. Auto-enrolment is a huge leap in the right direction, but it won’t be enough.

“If someone entering work today wants to retire on anything near what their grandparents or parents can expect, they cannot rely solely on minimum auto-enrolment contributions. The reality is that the younger generation can’t expect as much from their employer, so they will need additional contributions or other sources of savings to end up with a decent retirement income.

“Auto enrolment is a great start, but it needs simplification and clarification around state pensions to make saving worthwhile. The trick to its success will be to get the younger generation into saving through inertia, so they start saving as early as possible in their careers.

“Auto-enrolment will see millions of people paying into a pension scheme for the first time. These people should be asking their employers what steps they are taking to see that their defined contribution pensions are being efficiently managed, including minimised charges and making sure the funds provided are good performers.”

Despite the findings, TUC General Secretary Brendan Barber remained optimistic that auto-enrolment would reverse decline in pension provision.

He said: “UK workplace pensions were once the envy of the world. But too many employers have walked away from their responsibilities, and now just one in three private sector workers are in a pension, threatening many with a miserable retirement.

“This is why automatic enrolment into pensions is so welcome. Every employer will now have to play their part – a victory for many years of union campaigning.

“With this government and the last helping ensure a wide consensus around the reform package, we have some certainty that we are now at the beginning of a pensions new deal. Of course it can, and should, be made better. But we now have what should be a stable framework.

“With similarly big issues like the future of social care still to be addressed, important lessons can be learnt from the success of pension reform.”

This was posted in Bdaily's Members' News section by Tom Keighley .