Auto-enrolment to kickstart savings but will pensions come up short?

NEW auto-enrolment pension arrangements will kick-start the nation into saving, but millennials’ pensions will fall far short of today’s pensioners, new research has suggested.

An analysis by PwC has shown that a 22-year-old woman being auto-enrolled in to a pension scheme from today is likely to end up receiving only roughly a third of her final salary as a pension, unless she contributes significantly more than the minimum requirements.

This is less than half the pension amount in today’s terms that her grandparents enjoy on a final salary scheme, despite the younger generation having to pay into their pensions for around eight years longer.

Despite auto-enrolment being viewed as a positive and much-needed step, the research highlights that people cannot expect auto-enrolment alone to provide pension payouts anywhere close to the level their grandparents or parents will receive, due to much lower employer contributions.

PwC calculates that a female entering work on a salary of £21,000, who will be auto-enrolled into her company pension scheme on the statutory minimum contributions, can expect to receive a pension income of around £18,000 a year, in today’s terms, when she retires at age 70.

This equates to roughly a third of the £50,000 a year salary, in today’s terms, she could be receiving as she nears her likely state pension age. This is much lower than the two thirds of final salary enjoyed by many pensioners today and comes despite contributing more than £74,000 over her lifetime, in today’s terms. Based on the analysis, she can expect pension payments of around £410,000, in today’s terms, over the course of her retirement.

PwC calculates that the 22-year-old will need to contribute an extra 14% of her salary each year over the course of the next 48 years to have a similar pension to her grandfather, or an extra 4% each year to have a similar pension to her father.

Steve Blackmore, pensions director at PwC, said: “People entering work now are facing substantially lower pensions than their grandparents and parents. Auto-enrolment is a huge leap in the right direction, but it won’t be enough.

“If someone entering work today wants to retire on anything near what their grandparents or parents can expect, they cannot rely solely on minimum auto-enrolment contributions. The reality is that the younger generation can’t expect as much from their employer, so they will need additional contributions or other sources of savings to end up with a decent retirement income.

“Auto enrolment is a great start, but it needs simplification and clarification around state pensions to make saving worthwhile. The trick to its success will be to get the younger generation into saving through inertia, so they start saving as early as possible in their careers.”

He said auto-enrolment would see millions of people paying into a pension scheme for the first time and these people should be asking their employers what steps they are taking to see that their defined contribution pensions were being efficiently managed, including minimised charges and making sure the funds provided are good performers.