Saturday, 22nd September 2018
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John Smiles

Qualified Financial Advisor

Pension auto-enrolment - does it work?

Last September, in a speech to the employer's group IBEC, Leo Varadkar announced the centrepiece of the upcoming national pension plan – "auto-enrolment". He told the audience that two-thirds of private sector workers in Ireland have no pension and warned that the time bomb must be addressed now.

In the UK, the Pensions Policy Institute (PPI) has published a briefing note on the impact of auto-enrolment on younger people and future generations. The briefing note highlights the change in participation brought about by automatic enrolment, and uses case study projections to consider the types of outcomes for individuals.

Approximately 11 million people make up the 'target group' of savers who are supposed to benefit in some way from auto-enrolment. Of those, 40% are millennials, born between 1982 and 1995.

Savings data for eligible employees suggests that by 2015/16, participation in workplace pensions stood at 72% of eligible 22-29 year olds. In 2011/12, however, participation for the then 22-29 year olds was at 36%. This represents an increase of 36% which suggests that participation in workplace pension schemes has doubled as a result of auto-enrolment.

The average opt-out rate for automatically enrolled employees has been fairly consistent since implementation at around 9% of employees.

In order to assess the effect on future retirement benefits, the PPI modelled four hypothetical individuals to examine the effect of auto-enrolment on millennials with different characteristics. Unsurprisingly, this clearly showed that those who save for longer will do better while those saving for a shorter period will see a dramatic negative impact on their retirement outcomes. So taking career breaks will adversely affect our retirement pots. Women are most likely to be affected by this as a career break of 10 years for ages 30-39 inclusive could reduce the pension fund saved by them by 30%. That does not take in account the amount of income foregone during the career break.

The great unanswered question is the State Pension. Will it be scrapped or replaced with a less attractive deal? It is important that this issue be addressed early to allow people plan properly for their retirement.

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