‘We mustn’t take our foot off the pensions pedal’

interactive investor comments as government figures show ‘stabilisation’ in pension participation, but reveal ‘huge’ inequalities.

Highlights from the DWP Workplace Pension Participation and Savings Trends 2009 to 2020 report, published this morning (September 2):

- 88% of eligible employees – 19.4 million people – are in a workplace pension scheme, up from 19.2 million last year (the same proportion).

- Average annual contribution of £5,458. Public sector men saved the most at just under £9,000 a year, compared with around £6,400 for women employed in the public sector; £2,400 approximately for men in the private sector and just under £2,000 for women employed in the private sector.

- Biggest drop in contributions among men in the private sector. Average amount saved by male and female eligible savers in the private sector fell in 2020 by £115 and £3 respectively; in the public sector, amounts saved increased by £161 and £189 respectively.

- Male part-time workers pension participation in the private sector is in decline.

- Annual savings from eligible savers increased to £105.9 billion, from £98.4 billion last year, mainly driven by public sector increase of £5.7 billion. £0.2 billion decline in private sector.

- Higher female participation in both full-time (90% v 88%) and part-time (86% v 73%) occupations.

- Large increase in 22- to 29-year olds in private sector participating, from 24% in 2012 to 84% in 2020.

- Gaps in participation have narrowed with small employers and hospitality industries catching up since 2012.

- Low participation among ‘micro’ employers and Pakistani and Bangladeshi employees.

- 3 in 4 workers saving ‘persistently’. Persistency rate has decreased to 65% from 78% in 2009 to 2012. Higher in the public sector (69%) and 63% in private sector.

- Proportion stopping saving has decreased from 1.9% to 1.6%, mainly driven by end of employment.

- 65% of amount saved is from employer contributions, 25% from employee contributions and 10% from tax relief.

- Higher earners and those employed by large or very large companies most likely to be participating.

- Voluntary ‘opt-in’ participation among non-eligible employees fell in 2020.

Commenting on the report, Becky O’Connor, Head of Pensions and Savings, interactive investor, the number one flat-fee pension platform, said: “Automatic enrolment has been an unequivocal policy success story, but we mustn’t take the foot off the pensions pedal. It’s worrying to see declining rates of saving in the private sector, particularly among men working part time.

“There is still huge inequality in contribution rates and retirement outcomes, depending on the type and generosity of workplace schemes someone has during their career. The DWP figures show that public sector men on average contributed more than four times the amount women working in the private sector set aside last year, for example.

“There remain strong arguments for further reform to ensure that the pots people are diligently building up through workplace saving actually do what they expect them to, which is to pay them a decent income in retirement.

“Being in a pension scheme is only half the story. How that works out depends on contributions and growth. At the moment, millions of workers still face disappointment when they come to retire, as their pots may not be sufficient to make them comfortable.

“The prospect of lower for longer growth in global stock markets, for example, means returns may not be high enough to give people a decent retirement even after a lifetime of saving diligently through workplace schemes.

“Assuming investment growth of 3% a year, a woman contributing £2,000 a year from 22 to 67 would be looking at a pot worth £165,590 on retirement. If she had a target retirement income of £11,000, her money would run out at age 78.”

“Younger workers in particular need more education around the benefits of accepting a little more risk in a pension in the early years for the prospect of higher returns later on. Our research* has shown that an estimated four million workers under 40 are in low-risk pensions, missing out on the potential for higher returns and the ultimate higher retirement income this would generate.”

“Employers and pension providers can’t rest on their laurels. Increasingly, the generosity of a workplace pension is likely to be considered when choosing an employer, as workers cotton on to the big disparities in what’s on offer and choose a job with a workplace offering a better pension scheme over one that is less generous.”

Strong argument for further reform include:

• Increasing the minimum amount from 8% to 12%, for instance, as highlighted in the ‘Is 12% the new 8%?’ report from interactive investor and LCP, the actuarial consultants.
• Reducing the minimum age of eligibility for auto-enrolment from 22 to 18.
• Reducing the earnings trigger for auto-enrolment from £10,000 to £6,240 (the lower level of qualifying earnings), to bring more low-income workers into the system
• More education and guidance on risk and returns for younger workers from employers

​​Notes to editors

• Four million low-risk pension holders missing out on potential for higher returns