As auto-enrolment passes its 10th birthday, we have an opportunity to look to the future and see the impact it is likely to have on future generations of retirees. Overall, we’re in a much better place than we would have been had auto-enrolment not been introduced. But challenges remain, especially for Generation X and millennials.
Together with analysis from the Pensions Policy Institute, we looked at the current pension savings for thousands of individuals and used the data to create realistic pension forecasts 1 for each individual at state pension age. We then compared these forecast retirement incomes with commonly accepted definitions 1 of an adequate retirement income using the Pensions Commission’s target replacement rates 2 and the PLSA’s retirement living standards 3 as our benchmarks. The replacement rates are the estimated proportion of income from work that someone needs in retirement, while the PLSA standards
estimate the lifestyle you could afford with a given income.
Policymakers knew at the outset of auto-enrolment that pension income resulting from saving 8 per cent of band earnings and the state pension would not lead to an adequate retirement 2. And our research restates this. Auto-enrolment is doing what was expected: it’s set to give the millennial cohort a baseload retirement income below the main adequacy measures as previously referenced.
It’s not surprising, that our research shows only 27 per cent of millennial households are on
track to hit their target replacement rate – two thirds of pre-retirement income for a median earner. Retirement income forecasts for millennials are worse than for either Generation X or the baby boomers, but millennials have more time to save if they choose to, or if auto-enrolment is reformed.
The situation for baby boomers and for Generation X is different. Forecast retirement incomes for both generations are, on average, better than for millennials.
Far more baby boomers are on track to achieve an adequate income, but the headline numbers conceal inequality. Overall, our research shows 60 per cent are on track to hit their target replacement rate. This is mainly due to the presence of DB pensions – often very substantial DB pensions – that are less common in other generations. For members of the boomer generation who did not have access to workplace savings during their working lives, outcomes are predictably worse. Auto-enrolment has come too late for these people. It will mean they won’t depend on the state pension alone, but it likely won’t get them close to an adequate income.
Generation X, meanwhile, is in trouble, with our research showing 35 per cent of households on track to hit their target replacement rate. While forecast retirement incomes for Generation X are higher on average than for millennials, many more are well below the Pensions Commission’s target replacement rate. They probably do not have enough time to make up lost ground, having not saved enough earlier. The suspicion that Generation X has been caught between the withdrawal of DB and the introduction of auto-enrolment is largely confirmed by the research.
So, what next? It’s obvious that with inflation high and a deep recession forecast, no one should be contemplating increases in statutory minimum contributions in the short term. Realistically, we are looking at a pause until economic normality returns. If there is a case for higher contributions, it’s going to have to wait. The pension sector should use this pause to engage with policymakers, discuss next steps and build a consensus that runs wider than the pension industry.
We also think that it is important that, before advocating a solution to the problems we’ve shown, policy makers and stakeholders settle on a set of objectives for what the pensions system is here to do. The Pensions Commission of 2005 argued for a system made up of a reformed state pension and auto-enrolment that deliberately produces outcomes below the adequacy threshold for most people 2. And that is what the policy is currently set to deliver.
We don’t think there is much mileage in pointing out that higher contributions will deliver higher retirement incomes without gaining a consensus on what the pension system as a whole should be trying to
achieve. Setting objectives for the system would enable a debate about what the right level of saving is for different groups we should be explicit about what level of income the pension system should target for the average individual. That should enable a much more constructive debate about whether we are getting auto-enrolment right.