The pensions time bomb

Industry experts have long warned that we are walking into another pensions crisis. While auto-enrolment has brought millions more people into the pensions fold, most of them are not saving nearly enough for a comfortable retirement.

Almost 90% of middle-earning private sector employees who are saving into a pension are putting aside less than the 15% of earnings recommended by Lord Turner’s Pensions Commission.

As Sangita Chawla, managing director at Standard Life, part of Phoenix Group, said: “The current pension system is under growing strain, with a number of long-term pressures starting to build. As things currently stand, many younger and midlife workers are at risk of missing even the PLSA's minimum standard of living in retirement, with the self-employed and those who are likely to be renting in retirement especially vulnerable.”

A new age for auto-enrolment

One simple change could help to counteract the brewing pensions adequacy crisis: starting auto- enrolment at age 18, rather than the current 22.

The good news is that the younger generation is receptive, according to new research by NOW: Pensions and Debate Mate, a charity.

The vast majority of young people – 86% – support the government’s proposal to reduce the auto- enrolment age from 22 to 18, according to the research, which was conducted among 1000 11-27- year-olds.

The younger generation also wants to learn more about pensions in school. An overwhelming 89% believe that pensions should be made a bigger part of the national curriculum.

Samantha Gould, financial adviser and head of PR and campaigns at NOW: Pensions said: “It is positive to hear that many of these students are engaged and want to understand more about savings and pensions as part of their schooling. A lot of people have financial regrets, quite often later in life, so if we can start to create an understanding about crucial financial topics that will stay with them into adult life, we can help them to shape their retirement journey."

Time to think ahead

A government bill is already in the pipeline which supports auto-enrolment starting at age 18, a move that MP Jonathan Gullis, who put forward the bill, has described as a “no-brainer”.

These changes are necessary to avoid unwanted consequences later on in the savings process, such as people being forced to work for longer, which is not always possible.

The Institute for Fiscal Studies, which is conducting a multi-year review of the current pension system, has already warned that forcing millions of people to remain in employment is not practical.

Paul Johnson, director of the Institute for Fiscal Studies explains: “Automatic enrolment has brought millions into workplace pensions, but all too often at much lower rates of saving than the Pensions Commission thought would be needed."

“Most private sector workers are left having to manage considerable risks – not least over how long their retirement will be – which for many will be incredibly difficult to balance well. And an increasing number are likely to spend their retirement in relatively expensive, and less secure, private rented accommodation which will have adverse consequences for both retirement living standards and the government’s housing benefit bill. A fresh look at the UK retirement saving environment is long overdue.”

The pace of change

While the widespread support for starting auto-enrolment earlier is encouraging, the pace of change is frustrating many industry experts. 

Pete Glancy, Scottish Widows’ head of pension policy points out: “Since a government review proposed the expansion of automatic enrolment in 2017 we have been calling for this to be implemented as a matter of urgency.”

Glancy adds: “Reducing the threshold age of automatic enrolment to 18 will increase average pension pots by up to 15% for younger workers and removing the lower earnings limit will increase the pension pots for those lower paid workers by up to 150%. This is exactly the type of decisive government action which is needed right now.”