Automatic enrolment for the people

Ellie Duncan

Features editor of FTAdviser and Financial Adviser

Auto-enrolment has started millennials on the pensions saving journey but the industry needs to do more to help them reach their destination, writes Ellie Duncan.

There are plenty of myths that prevail when it comes to millennials and their ability to save money, whether that is for a deposit or to build up a pension pot.

Millennials – commonly defined as those born between the early 1980s to early 1990s – apparently spend all their money on avocados, flat whites and travelling, if certain media outlets are to be believed.

Meanwhile, they have not saved nearly enough to get onto the property ladder, let alone to be able to fund their later years.

In reality, many millennials face a combination of low wages, skyrocketing house prices and the rise of the gig economy.

So, having to think about how they might afford to live once they have retired would seem fairly low down their list of priorities.

Millennial mindset

Ben Sassoon, chartered wealth manager at Drewberry, explains: “Younger individuals tend to focus on the short-term, such as saving for their first home.

“Pension funding is typically a secondary worry for many millennials, particularly as home prices have soared and home ownership is at a multi-decade low for this demographic.”

Unfortunately, I think the automatic nature of AE works against people in terms of making them think about their own retirement.
— Scott Gallacher, Rowley Turton

He continues: “As such, individuals tend to rent in the short-term and delay any meaningful pension funding until they meet various milestones, such as saving for a house deposit.”

But could auto-enrolment help millennials to address the issue of delaying saving for a pension?

Automatic enrolment into a workplace pension was introduced in the UK in October 2012, with the level of contributions being phased in over a period of time.

In February this year, the government confirmed more than 10 million had now been auto-enrolled into a workplace pension.

Auto-enrolment has already played a huge role in getting more millennials saving into a pension, according to Helen Morrissey, pension specialist at Royal London.

She quotes research by the Institute of Fiscal Studies which shows “opt-out rates are lowest among this age group, with the proportion of eligible 22 to 29 year olds with a private sector workplace pension increasing from 28 per cent to approximately 80 per cent”.

Only way is up

Minimum contributions are set to increase to 8 per cent from April 2019.

She says: “Our research also shows that most aren’t put off by the planned increase in auto-enrolment minimum contributions and some 75 per cent said they would increase their contributions automatically should they get a pay rise.

“This is a strong foundation, especially given the other financial demands millennials face, such as buying a home or paying off debt.”

But Ms Morrissey admits: “However, there is a long way to go in terms of building real engagement with pensions.”

This is partly because, while auto-enrolment (AE) contributions are rising, there have been several warnings from those within the pensions industry that these contributions will not be enough to fully fund an individual’s retirement years.

Mr Sassoon says: “Auto-enrolment is merely a legal obligation for employees to be offered a pension scheme with minimum funding guidelines. From April 2019, there will be a minimum 8 per cent contribution based on qualifying earnings.

“This is a significant improvement from the current 5 per cent total contribution. However, for many, this may be an insufficient level of funding.”

Scott Gallacher, chartered financial planner at Rowley Turton, agrees: “Rather than encouraging people to save, there’s a danger that people think the relatively modest AE contributions are the ‘correct’ amount rather than a starting point.

“Unfortunately, I think the automatic nature of AE works against people in terms of making them think about their own retirement, i.e. many people will think ‘I’m a member of my employer’s pension scheme so I must be sorted for retirement’.”

Tom Selby, a senior analyst at AJ Bell, points out the entire programme has been based on inertia so far, and urges for attention to now turn to building on this foundation “with a clear retirement engagement strategy”.

What more can the industry do to ensure millennials think about what their retirement needs are likely to be and how they are going to get there?

The industry needs to communicate that people of all age groups should look to save more than this wherever possible.
— Helen Morrissey, Royal London

Mr Selby hopes both the pensions dashboard and increased use of technology will help here.

“The sheer volume and complexity of information savers receive about the available options puts many off pensions altogether, with potentially disastrous consequences for their retirement prospects,” he suggests.

“As technology advances, the way people consume pensions information will inevitably change. Budgeting apps are already engaging millennials with their finances in ways that were previously not possible, and I expect pension providers to increasingly head in this direction too.”

Government input

Ms Morrissey insists the industry can do more to help people understand how much they need to save to retire comfortably, over and above auto-enrolment contributions.

“The industry needs to communicate that people of all age groups should look to save more than this wherever possible,” she notes.

However, Mr Sassoon wants to see more action from the government in tackling this issue.

“I think we need to actively encourage millennials to use a form of online calculator or government-funded helpdesk to allow them to better understand their funding requirements,” he says.

“This needs to be effectively encouraged by the employer or government to stave off a pension savings deficit.”

“The government should also consider providing tax-relievable financial advice for millennials via payroll or self-assessment. This would allow recipients of advice to receive a form of income-tax relief for financial advice they receive with respect to their auto-enrolment,” he adds.

Ellie Duncan is features editor of FTAdviser and Financial Adviser.

Published 04/03/2019


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