Auto-enrolment – the enemy of the younger generation?

A new report¹ has highlighted the problems the younger generation may face in terms of their future wealth. The world of Defined Contributions, as well as the introduction of auto-enrolment, has meant that people have many more choices to make with their pension. As Andy James, head of retirement planning at Tilney, explains, they are not necessarily making the right ones.

“The younger generation – basically anyone below 40 – seems to have a somewhat rose-tinted view about retirement. There are many people who are currently enjoying a comfortable retirement where they have the freedom, and the means, to travel and enjoy their later years.

“However, this is not necessarily a situation younger people will find themselves in. The slow disappearance of the Defined Benefit pension scheme means that people facing retirement further down the line will no longer have a guaranteed income they can expect in retirement. Instead, they need to be making some serious decisions now, before it is too late.

“We hear a lot in the press that overall pension contributions are at their highest level for very many years, if not all time. However, the average contribution has fallen from 9.6% of salary in 2012 to 3.9% in 2015. This fall means that the average pension contribution will in no way meet the needs of future retirees. And a big contributor to this is the birth of auto-enrolment.

“Since auto-enrolment came in, employers only have to pay 1% for every 1% an employee contributes. While it is great that this scheme has ‘forced’ employers to contribute to pensions who did not do so in the past, it also enabled some previously generous employers to reduce their contributions in line with basic auto-enrolment requirements for new joiners. This, and the overall averaging effect of the new lower contributions, has resulted in the average percentage being saved going down.

“This is a very serious problem with ominous implications. The average 30-year-old should be saving between 12-15% of their earnings into their pension if they want to have a comfortable retirement. But for many, the combination of graduate debt, rising inflation, rental costs and the difficulty getting a foot on the housing ladder, means this is not a realistic figure. The proposed increases in auto-enrolment contributions will be helpful but will not get anywhere near the required levels of contribution. However, saving just a few extra percent could make a huge difference. It is far more beneficial for younger people to save a couple of extra percent now, rather than increase their contributions by 10% when they are in their 50s.

“As always, you should consult your financial planner to ensure you are contributing as much as you can at every stage in your life to try to secure a comfortable retirement.”

¹ The Decision Citizens: Exploring the retirement challenges facing future generations, a report commissioned by Royal London