[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

Millenials to benefit most from pension automatic enrolment

Automatic enrolment will deliver varying levels of improvement in retirement incomes for different generations, according to research by the Pensions and Lifetime Savings Association (PLSA).

Younger savers to reap the benefits ©iStock
Younger savers to reap the benefits ©iStock

Their Retirement Income Adequacy: Generation by Generation report reveals that 1.6 million working people in the UK are at high risk of falling short of a minimum income standard (MIS), while 13.6 million might not meet their target replacement rate (TRR).

The PLSA analysis shows that, at present, 51% of generation x are more likely than not to achieve their TRR, with baby boomers at 45%, and millenials 39%, however planned changes in employer contributions are expected to give millenials better prospects than many of their elders.

PLSA director of external affairs, Graham Vidler, said: “Automatic enrolment is set to deliver a tangible improvement in the retirement incomes of millions of people but there is still work to do.

“For younger savers, increasing their automatic enrolment contributions from 8% to 12%, and working slightly longer, puts them on track for their target replacement rate.

Generation x was found to be caught between the slow decline of defined benefit (DB) pensions and the roll-out of automatic enrolment, with many not saving during their early working life and are now doing so at low levels.

Baby boomers are split between those who are still working, with very good retirement income prospects, and those without DB pensions who will be mostly dependent on the state pension.

Contribution changes are not likely to make a significant difference to those with low savings, and will mean that many will have to work to a later age, or find another means of income to finance retirement.

“For older workers, who have less time to save, achieving their target replacement rate may also require a choice to save more and using other assets, such as property, if they have them,” Vidler added.

The PLSA argue that an independent pensions commission should be set up, whose remit would be to:

•    Review existing measures of adequacy and make recommendations for a national standard, or standards, which reflect the changing nature of retirement

•    Make recommendations for increasing minimum contribution levels to at least 12% of qualifying earnings, including how and when this change should be made, and how it should be divided between worker and employer contributions

•    Make additional recommendations to improve the situation of older savers who have less time to benefit from an increase in contribution rates.

However Hymans Robertson partner, John Taylor, believes that employers do not have to wait for government changes to improve their employees’ retirement prospects.

He said: “The policy decisions needed to improve retirement incomes are far from simple and require careful consideration, with the challenge so substantial that progress needs to be achieved over decades.

“There are steps that can be taken in the workplace to improve outcomes for employees without waiting for policy interventions.

“There is strong evidence that new forms of engaging staff with savings can deliver good results.

“Employers who have the resource and appetite to improve employee outcomes can do so without waiting for policy interventions from government.”