Automatic enrolment  

Radical change demanded for decent retirement for all

Radical change demanded for decent retirement for all

The current auto-enrolment system will not be enough to ensure an adequate retirement for all, a report has warned.

The Resolution Foundation’s report on retirement said the UK requires a "step-change" in saving to mitigate the lower earnings experienced by current generations.

The recommendations in the Pension Commission’s final report in 2006 formed the basis of many recent policy changes including auto-enrolment and a flat-rate state pension, which, the report said, seem to have worked.

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Auto enrolment levels are set to increase from April 2018, when minimum contributions will rise from 2 per cent to 5 per cent, with the employer paying 2 per cent.

One year later, they will increase again to 8 per cent, with the company paying 3 per cent.

The report warned sufficient pension provision was particularly important given that younger generations looked less well-placed than baby boomers to accumulate other forms of wealth, such as housing wealth.

Even if millennials reached the same home ownership rates, “which would be a significant stretch”, the authors said it was "very unlikely" that they would experience the same large increases in wealth that baby boomers and the silent generation have experienced.

The report said: “Pensions is perhaps the one policy area where forward-thinking policy development and political consensus have led to a system that is at least seeking to put in place structures to help ensure intergenerational parity.

“However, given the length of time it takes for pension reforms to take effect, there is no space for government to take a pause. Short periods of under-saving now have long-term ramifications as generation X might all too soon find out. 

“Simply carrying on with the current path of auto-enrolment will not be enough if the Pensions Commission benchmarks of adequacy remain the aspiration. The UK will require a step-change in its saving to ensure an adequate retirement for all.”

But the foundation found future generations of retirees were unlikely to meet the adequacy benchmarks set by the commission in 2006.

Earnings replacement rates – the measure the commission established to benchmark retirement income adequacy – have fallen short of the target for all but the lowest earners, it found.

About three quarters of adults retiring during this century – mainly comprising the youngest members of the silent generation and the oldest baby boomers – had replacement rates below the benchmark for their level of earnings, it said.

Despite this, results suggested future cohorts of pensioners could achieve better results.

“Across earnings distributions, projected replacement rates for the younger baby boomers through to the millennials are certainly not the disaster that public perceptions would suggest. They remain, however, far from the adequacy benchmarks that the Pensions Commission set in its sights” the report said.

It projected future pension incomes to hold steady, rather than improve, for successive generations. Over the lifetime it expected overall incomes to be lower, “driven by the long-run effect of weak earnings growth in recent years that has affected millennials in particular”.