Scientists once conducted a study in which they put a group of children in a room and gave them two options – either they could have one marshmallow right away, or two marshmallows if they waited 15 minutes. On average, only one-third of the children could delay their gratification long enough to get a second marshmallow. Adults and savings are not so different.
Pensions share a similar concept to the marshmallow study. If a person puts money into a pension, compound interest allows it to grow over time, as do benefits like matching and tax incentives, so the sooner an individual starts their savings the more value they will get for their investment in the long run.
The UK is coming up to a savings crisis. For the first time, retirees will be worse off than the previous generation. Those born in the 1960s and 70s will be the first generation of retirees worse off than their parents, the Institute for Fiscal Studies has previously warned. Auto-enrolment was brought in to help lessen the blow, and so far the policy has been largely successful. But there is still a long way to go.
One down, many to go
To a financial adviser, compound interest is a beautiful thing. It is the ultimate example of delayed gratification – save some money now and essentially get some for free. But, unfortunately, many clients do not understand that and prefer to spend their money in the short term rather than save.
Longevity will compound this problem. As people live longer, they will need more saved to last them into their old age. Low inflation will also pose a great problem for pensions if it continues, as many schemes base their annual increases on inflation figures.
Auto-enrolment has been successful in one sense, but has yet to be in another. While it has helped to increase the number of people with a pension and the total amount of pension contributions, the median amount that people are paying in has declined.
The higher minimum contribution rates that are set to be phased in will help the situation, but by no means solve it. The 8 per cent level will be an improvement but will not result in sufficient retirement savings for all, and may lure many into thinking that they have more saved than they do.
Auto-enrolment came into effect in 2012, so changes to the market have been fast. Since last year’s survey, staging dates have kicked in for all employers with 39 to 59 employees, and select employers with particular reference codes and fewer than 30 employees.
But this year’s data has revealed that some providers are making auto-enrolment more difficult for smaller employers by increasing their minimum requirements for employees per scheme and total annual premiums per scheme. By increasing these requirements, providers may be signalling that they do not want to provide pension coverage to small, usually less established firms.
By the numbers
Basic details of plans in this survey, including the minimum number of employees required, total annual premiums per scheme, and contributions per member, from different providers are shown in Table 1. Some figures are left as a dash to specify that those providers price on a scheme-by-scheme basis, which most commonly occurs when determining the minimum contribution that would be required from each member. This means that employers will have to deal directly with the provider to figure out appropriate requirements for their individual situation.