Auto-enrolment and the young
As we heard from former shadow chancellor Ed Balls at our annual New Model Adviser conference and awards, there is still a lot of work to be done to further embed consensus regarding the government's auto-enrolment policy.
As part of its analysis of this policy, The Pensions Policy Institute (PPI) has published a briefing note on the impact of auto-enrolment on younger people and future generations.
It considers the impact of the introduction of auto-enrolment on younger people and future generations particularly the young cohort of workers entering the workforce who may be automatically enrolled in to pension schemes for their entire working life.
In addition, it highlights the change in participation brought about by automatic enrolment, and uses case study projections to consider the types of outcomes for individual millennials.
Click on to read its key conclusions.
The maths says: millions of millenials
According to the PPI, 11 million people make up the 'target group' of savers who are supposed to benefit in some way from auto-enrolment.
These are employees who fulfill eligibility criteria for auto-enrolment. They are:
- Over age 22
- Below State Pension age
- Earning over the trigger amount (£10,000) from their employer
Of this group, approximately 40% are millenials, born between 1982 and 1995.]
This means that there are around 4.4 million targets of auto-enrolment who fall into the millenial category.
Auto-enrolment is working for the young
According to the PPI, savings data for eligble employees suggests that by 2015/16, participation in workplace pensions stood at 72% of eligible 22-29 year olds.
In 2011/12, however, participation for the then-22-29 year olds was at 36%.
This represents an increase of 36%, which suggests that participation in workplace pension schemes has doubled as a result of auto-enrolment.
According to the PPI, the average opt out rate for automatically enrolled employees has been fairly consistent since implementation at around 9% of employees.
Many experts would cite the stability of this figure as representing a particular success for the government. Ministers are now very keen to prevent it increasing when the mandetory minimum contributions increase in April this year.
But despite this it appears that millenials are still in a good position.
Department for Work & Pensions analysis of samples of employers who staged in 2013 and in 2014 indicated that millennials were least likely to opt out (with opt out rates at around 7% in 2014), with employees over 50 being most likely (with opt out rates around 23% in 2014).
The PPI modelled four hypothetical individuals to examine the effect of auto-enrolment on millennials with different characteristics.
The individuals were modelled stochastically by performing runs using 3,000 scenarios of possible future economic outcomes and investment returns. The body's conclusions are presented as the median outcome of the stochastic runs, with distributional results highlighting the quartile outcomes.
Case studies: the men
- Tom, an older median earning millennial man, aged 35 in 2017, at age 40 he earns £34,000 in 2017 earnings terms.
- Jack, a younger median earning millennial man, aged 22 in 2017, at age 40 he earns £34,000 in 2017 earnings terms.
Case studies: the women
- Ruth, a high earning millennial woman, earning at the 90th percentile rate, aged 27 in 2017, at age 40 she earns £49,000 in 2017 earnings terms.
- Jem, a low earning millennial woman, earning at the 30th percentile rate, aged 27 in 2017, at age 40 she earns £19,000 in 2017 earnings terms.
Conclusions: the men (pt.1)
With the current auto-enrolment minimum contribution, Tom (an older millenial aged 35 in 2017 with assumed earnings of £34,000 at age 40) can expect to obtain a pension pot of around £75,000 at state pension age.
With 8% total contributions, however, he could expect to have a pension pot of around £130,000 at state pension age.
With 16% total contributions, he could expect to have a pension pot of around £250,000 at state pension age.
Conclusions: the men (pt.2)
According to the PPI, Jack (a younger millenial aged 22 in 2017, assumed to earn £34,000 at age 40) would retire with a pension pot of around £100,000, if he made the minimum auto-enrolment contributions.
However, if he had made 8% total contributions, he could retire with a further £25,000 (£125,000).
But if he made 16% contributions, he would receive a pension pot of more than £250,000.
Conclusions: the women (pt.1)
According to the PPI, Ruth (a high millenial earner aged 27 in 2017, assumed to be earning £49,000 at age 40) could expect to have a pension pot of just under £150,000 if she saved on minimum auto-enrolment pension contributions.
If she saved with 8% total contributions, however, she could expect a retirement fund at state pension age of over £200,000.
Ruth would earn the biggest pot of all the case studies, however, if she used her higher salary to contribute 16%. That would take her well over the £400,000 mark.
Conclusions: the women (pt.2)
Surprising nobody, Jem, the low-earner of the group, would not even necessarily have a pot of £50,000 if she saved at minimum auto-enrolment contribution rates.
If she saved with an 8% contribution rate, she would have around £75,000, and with 16% total contributions she might retire with a pot of £175,000.
Saving for longer or shorter periods of time
Surprising nobody, saving for longer or shorter periods of time can have a dramatic impact on retirement outcomes.
According to the PPI:
'Saving for five years beyond State Pension Age (SPA) can increase the amount in the pension fund. For example, Ruth could increase her pension by 14% from £158,100 to £180,700 by saving for five more years.'
'Ceasing to save before State Pension age can be detrimental to the pension fund. In the case of Tom, ceasing to save five years before retirement reduces his pension from £79,700 to £68,000, a reduction of around 15%.'
Likewise, taking career breaks could really effect our millenial case studies' retirement pots:
'A career break of 10 years for ages 30-39 inclusive could reduce the pension fund saved by Jem by 30% from £51,700 to £36,300. The impact of the career break on an individual depends on the level of earnings forgone during the period of the career break.'
The Triple Lock
We might normally associate the triple lock with the raft of seemingly unfair benefits dumped upon rich pensioners who don't actually need bus passes and use their state pension to fund nice trips to the pub (we do accept that not all pensioners are rich).
However, the PPI has projected outcomes in the (ahem, unlikely) event that millenials receive a state pension, let alone one that has a triple lock on it.
To be fair though, they have also projected outcomes regarding the absence of a triple lock too, in the event that it is either a) scrapped or b) replaced with a less attractive deal.
As the report said:
'When the first millennials reach their state pension age (SPA), the triple lock would have been in effect for around 40 years, therefore would have had a longer period to influence the level of state pension.'
Triple lock tribulations...
If the triple lock were to be removed, then there are two likely replacement policies:
1) The so-called double lock, which would uprate the state pension by the greater of earnings and CPI, or:
2) A 'single lock': which would uprate the state pension by earnings growth alone.
According to the PPI:
When the first millennials reach SPA in around 2050, any uprating policy introduced in 2020 will have been in effect for 30 years.
Jem’s total pension income (state and private) would be 2% lower under the double lock than the triple lock, and would be 5% lower under earnings growth than triple lock.
The proportional impact of a change in state pension uprating on an individual’s total retirement income depends on how
reliant they are on the state pension.
Ruth is less dependent on the state pension, so her reduction is a lower proportion of her total retirement income. For example, the reduction from triple lock to earnings uprated is less than 4% of her total retirement income.