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Baby boomers, Gen X, Millennials – who’s in line for what pension?

Graham Vidler

The Pensions and Lifetime Savings Association (PLSA) has published new research analysing the incomes different UK generations can expect in retirement. Graham Vidler, Director of External Affairs, Pensions and Lifetime Savings Association.

The report, ‘Retirement Income Adequacy: Generation by Generation’ reveals that automatic enrolment will deliver a real improvement in the retirement outcomes of millions of people in the UK, but there is still room for improvement. Of the 25.5 million people in employment: Graham Vidler, Director of External Affairs, Pensions and Lifetime Savings Association: “Automatic enrolment is set to deliver a tangible improvement in the retirement incomes of millions of people but there is still work to do. For younger savers increasing their automatic enrolment contributions from 8 percent to 12 percent and working slightly longer puts them on track for their target replacement rate. For older workers, who have less time to save, achieving their target replacement rate may also require a choice to save more and using other assets, such as property, if they have them.

It is clear from our analysis that minimum contributions under automatic enrolment need to increase to at least 12 percent. The precise level, the timing of the change and the balance between employer and employee contributions are issues which need to be fully thought through in the light of the effects of increases in contributions due in 2018 and 2019. The 2017 review is an opportunity to start working towards this next phase of automatic enrolment. The success of automatic enrolment to date has been underpinned by wide consensus and support as established by the Pension Commission. To ensure the next phase of automatic enrolment builds on this success the Government should begin by creating an independent commission.

John Taylor, Partner at Hymans Robertson, added: “We agree that increasing auto-enrolment minimum contributions is the right thing to do, but only once the tabled increases have bedded down. If we go too fast we run the risk of undermining support amongst employees and employers.

“The policy decisions needed to improve retirement incomes are far from simple and require careful consideration, with the challenge so substantial that progress needs to be achieved over decades. Unfortunately, the temptations of the electoral cycle can compromise long-term strategy. Fortunately there are steps that can be taken in the workplace to improve outcomes for employees without waiting for policy interventions – particularly for those who have time to make up the shortfall. There is strong evidence that new forms of engaging staff with savings can deliver good results. Employers who have the resource and appetite to improve employee outcomes can do so without waiting for policy interventions from government.”

The PLSA recommends the remit of an independent pension commission should cover three areas.

1. Review existing measures of adequacy and make recommendations for a national standard, or standards, which reflect the changing nature of retirement.

2. Make recommendations for increasing minimum contribution levels to at least 12 percent of qualifying earnings, including how and when this change should be made, and how it should be divided between worker and employer contributions.

3. Make additional recommendations to improve the situation of older savers who have less time to benefit from an increase in contribution rates.

Millennials: the automatic enrolment generation
This generation will be the first to experience the UK pension system as intended by the reforms of the last decade – the full basic state pension and saving over a full working life through automatic enrolment – but for those in a defined contribution scheme it won’t be enough to get them to a TRR. For them to achieve a TRR they will need higher pension contributions and to work slightly longer. (See notes to editors for case study models.)

Generation X: the in-between generation
This generation is caught in between the slow decline of defined benefit pensions and the roll-out of automatic enrolment. Many in this generation did not save into a pension during their early working lives and are now saving at a low level through automatic enrolment. Consequently the jump to achieving TRR is greater for this group than for the millennial group. Increasing pension contributions alone is unlikely to close the gap for this generation – they may need to work longer and utilise other assets, such as property, to generate a higher retirement income. (See notes to editors for case study models.)

Baby Boomers: the have and have not generation
Of Baby Boomers who are still working, those who have accrued defined benefit pension entitlement have very good retirement income prospects, but others face a comparatively poor income in retirement. Those without defined benefit may come to retirement with ten years or less of pension saving through automatic enrolment meaning they will be mostly dependent on the State Pension. For this group, working later is likely to make a real difference – providing an opportunity to increase the amount they have saved while at the same time decreasing the time they will be dependent on a retirement income. Positively, the majority of this generation has some property wealth which it may be able to use to generate an income in retirement.

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