Automatic Enrolment has created a culture of pensions savings – what has changed? What is next for the industry?
Automatic enrolment has revolutionised the UK’s saving landscape, bringing millions of new people into pensions saving and reversing years of decline. It has created a ‘new norm’ in pension savings, especially for younger people.
Our research suggests pension saving is becoming an established part of British culture with support for automatic enrolment at an all-time-high (83 per cent). Nearly twice as many workers think pension saving is normal for people like them (46 per cent in 2018 compared to 25 per cent in 2014).
With forecasts showing that by the late 2020s one third of the working population is expected to have a Nest pension pot, our focus is to build upon the success of auto enrolment and help our members save for their best possible retirement.
The TPR’s Master Trust Assurance regime has sped up consolidation in the sector. We now have a model emerging of large scale, well governed schemes, with huge potential to deliver value for money for savers over the long term. Schemes like Nest can leverage their scale to get best value from scheme administration providers and asset managers. That means, over time, charges to members should fall.
Reputationally, there is still work to do to build trust in pensions. Members don’t necessarily see the difference between this new type of well-governed scheme, and schemes that may have been very much more vulnerable to failure in the past. As an industry we need to work together to demonstrate how the pension sector can both deliver great returns for members and be a force for good in responsible investment.
Is this an opportunity for people to take ownership and think about whether they are saving enough? How do people decide how much to save?
We would strongly encourage all of our members to consider whether they are saving the right amount to achieve the retirement they expect. While those on continuously low incomes may have a similar income from the state pension alone, many savers are likely to find that contributing at the minimum of 8% does not deliver an income that meets their expectations for retirement.
There is a danger that savers ‘anchor’ to 8% as a norm – so we need to help them to see that, if this is their only pension, they should be thinking about saving more.
We support the delivery of a pensions dashboard, and hope that as an industry we can find a way to combine pensions information on the dashboard in a way that delivers an income prediction for retirement that people understand. Research from Australia suggests that income framing can have a significant impact on people’s likelihood to increase their pension saving.
We are also interested in how we can bring people’s pension information to them, in places they already go – for instance via banking and financial management apps.
Interaction of short- and long-term savings? How can the pensions industry support this?
Short-term financial vulnerability and debt are major issues for auto enrolled savers – these affect the ability of people to deal with short-term financial shocks and to contribute persistently to a pension.
Across the pensions industry, we are in a strong position to consider a broader approach and push through innovations that improve savers’ financial resilience overall, making it more likely that they will keep saving, and in some cases save more.
Nest Insight is trialling a sidecar model savings model which is a hybrid savings product that combines a liquid ‘emergency’ savings account with a traditional defined contribution pension.
This uses the idea of ‘set and forget’ to create a persistent flow of contributions to savings as well as giving people access to some emergency savings to help build short-term resilience and safeguard against problem debt whilst protecting long-term retirement savings
Early results are expected later this year and if evidence demonstrates the concept of a 'pensions sidecar buffer' has a positive impact on financial wellbeing, it could be adopted voluntarily by employers, or it could even be taken up as a statutory development.
Is more regulation needed like changes to the Lower Earnings Level or contributions from the first pound?
There is always room for improvement across the pensions industry – we want to make sure as many people are saving as adequately for their retirement as possible, and that pension schemes are delivering a high-quality product for savers.
At Nest we believe there are a few key changes which could drastically improve pensions savings across the board.
Lower age limit: If the age is lowered from 22 to 18, we can expect an increase in the pool of eligible workers but more importantly it will help to establish a savings habit from an early age. At Nest, we see the lowest rates of people leaving pensions savings in our youngest savers.
Lower earnings limit: Lowering, or dropping entirely, the lower earnings limit would help boost the pension contributions of lower earners among the existing automatic enrolment population and increase pot size more quickly, particularly when you also consider the impact of the additional tax relief and employer contributions which would also increase.
Lowering the earnings trigger: Lowering the earnings trigger to below £10,000 would bring more workers into pensions saving who are on low incomes. It would also bring in workers who have multiple jobs which individually are below the trigger, who have jobs which are currently under the earnings trigger but would be picked up if the trigger was lowered.
Women currently experience a pension income gap of around 40%. All three measures would have a significant impact on women’s level of retirement saving and closing this gap.
Automatic enrolment has revolutionised the UK’s saving landscape, bringing millions of new people into pensions saving and reversing years of decline. It has created a ‘new norm’ in pension savings, especially for younger people.
Our research suggests pension saving is becoming an established part of British culture with support for automatic enrolment at an all-time-high (83 per cent). Nearly twice as many workers think pension saving is normal for people like them (46 per cent in 2018 compared to 25 per cent in 2014).
With forecasts showing that by the late 2020s one third of the working population is expected to have a Nest pension pot, our focus is to build upon the success of auto enrolment and help our members save for their best possible retirement.
The TPR’s Master Trust Assurance regime has sped up consolidation in the sector. We now have a model emerging of large scale, well governed schemes, with huge potential to deliver value for money for savers over the long term. Schemes like Nest can leverage their scale to get best value from scheme administration providers and asset managers. That means, over time, charges to members should fall.
Reputationally, there is still work to do to build trust in pensions. Members don’t necessarily see the difference between this new type of well-governed scheme, and schemes that may have been very much more vulnerable to failure in the past. As an industry we need to work together to demonstrate how the pension sector can both deliver great returns for members and be a force for good in responsible investment.
Is this an opportunity for people to take ownership and think about whether they are saving enough? How do people decide how much to save?
We would strongly encourage all of our members to consider whether they are saving the right amount to achieve the retirement they expect. While those on continuously low incomes may have a similar income from the state pension alone, many savers are likely to find that contributing at the minimum of 8% does not deliver an income that meets their expectations for retirement.
There is a danger that savers ‘anchor’ to 8% as a norm – so we need to help them to see that, if this is their only pension, they should be thinking about saving more.
We support the delivery of a pensions dashboard, and hope that as an industry we can find a way to combine pensions information on the dashboard in a way that delivers an income prediction for retirement that people understand. Research from Australia suggests that income framing can have a significant impact on people’s likelihood to increase their pension saving.
We are also interested in how we can bring people’s pension information to them, in places they already go – for instance via banking and financial management apps.
Interaction of short- and long-term savings? How can the pensions industry support this?
Short-term financial vulnerability and debt are major issues for auto enrolled savers – these affect the ability of people to deal with short-term financial shocks and to contribute persistently to a pension.
Across the pensions industry, we are in a strong position to consider a broader approach and push through innovations that improve savers’ financial resilience overall, making it more likely that they will keep saving, and in some cases save more.
Nest Insight is trialling a sidecar model savings model which is a hybrid savings product that combines a liquid ‘emergency’ savings account with a traditional defined contribution pension.
This uses the idea of ‘set and forget’ to create a persistent flow of contributions to savings as well as giving people access to some emergency savings to help build short-term resilience and safeguard against problem debt whilst protecting long-term retirement savings
Early results are expected later this year and if evidence demonstrates the concept of a 'pensions sidecar buffer' has a positive impact on financial wellbeing, it could be adopted voluntarily by employers, or it could even be taken up as a statutory development.
Is more regulation needed like changes to the Lower Earnings Level or contributions from the first pound?
There is always room for improvement across the pensions industry – we want to make sure as many people are saving as adequately for their retirement as possible, and that pension schemes are delivering a high-quality product for savers.
At Nest we believe there are a few key changes which could drastically improve pensions savings across the board.
Lower age limit: If the age is lowered from 22 to 18, we can expect an increase in the pool of eligible workers but more importantly it will help to establish a savings habit from an early age. At Nest, we see the lowest rates of people leaving pensions savings in our youngest savers.
Lower earnings limit: Lowering, or dropping entirely, the lower earnings limit would help boost the pension contributions of lower earners among the existing automatic enrolment population and increase pot size more quickly, particularly when you also consider the impact of the additional tax relief and employer contributions which would also increase.
Lowering the earnings trigger: Lowering the earnings trigger to below £10,000 would bring more workers into pensions saving who are on low incomes. It would also bring in workers who have multiple jobs which individually are below the trigger, who have jobs which are currently under the earnings trigger but would be picked up if the trigger was lowered.
Women currently experience a pension income gap of around 40%. All three measures would have a significant impact on women’s level of retirement saving and closing this gap.
