How to get people saving more for their retirement
Once a year, the Office for National Statistics (ONS) publishes the results of its survey of occupational pension schemes. The results of its 2015 survey have just been published and they make alarming reading.
But before we get on to the gloom and doom, let's start with the good news!
According to the survey, there are now more people who are members of occupational pension schemes than ever before. A total of 33.5 million people are members of such schemes, an increase of around 10 per cent on a year earlier.
Those 33.5 million people split almost exactly equally into three groups - around one third who are receiving pensions, a third who have rights built up from a previous job which they have not yet taken, and a third who are currently contributing into a scheme.
The reason why the total number of scheme members has gone up is partly because we are all living longer but is mainly because of the policy of automatic enrolment.
This is the legal requirement for firms to choose a pension scheme for their workforce and to enrol them into it. Although workers are free to opt out, approaching 90 per cent of employees have stayed enrolled, which is very good news.
The programme of automatic enrolment will continue into 2018, so future versions of the survey are likely to show continuing growth in scheme membership.
So if record numbers of people are now members of pension schemes, what is the bad news?
The answer is that although lots more people are now saving into a pension, the amounts that they are contributing are in most cases far too small to generate the sort of retirement that they would want for themselves.
The ONS survey reveals a dramatic division between the amount that is going into old-style defined benefit (DB) or salary-related pension schemes, and the amount that is being saved through the defined contribution (DC) pension schemes which are increasingly the norm for people joining the workforce today.
For DB pensions, the average regular contribution stands at around 21 per cent of earnings, with more than three quarters of this coming from employers. By contrast, the average contribution into a DC pension is shockingly low at just 4 per cent.
Arguably, this 4 per cent figure is an artificially low one because it reflects the fact that statutory minimum contributions into automatic enrolment schemes are currently just 2 per cent - 1 per cent from the firm and 1 per cent from the worker.
But even when automatic enrolment is fully in place by 2019, the minimum contribution will be just 8 per cent. Compare this rate with the percentage going in to DB schemes today, and you can see the problem.
SO WHAT CAN BE DONE ABOUT THIS?
In my view there are basically three options. At one extreme, the government could decide that people are simply not saving enough and force everyone to save into a pension at a realistic rate. This compulsory approach has worked well in some other countries, notably Australia.
However, whilst compulsion is always an option, there would be considerable political difficulties. To some people, compulsory pension saving would feel very much like taxation.
Given that a total contribution rate of at least double current levels is probably needed, this would feel like a very large increase from where we are now. It would be a brave government that took this step.
At the other extreme, the government could simply do nothing and leave it to individuals to decide how much they want to save beyond the current legal minimum.
The trouble with this approach is that growing numbers of people will reach later life either obliged to work on for much longer than they would wish, or retiring on a meagre pension and suffering a miserable retirement. Neither of these outcomes is particularly attractive.
In my view the answer is to 'nudge' people to contribute more, just as they have been nudged into saving in the first place.
The US has pioneered the concept of 'Save More Tomorrow', where people commit today that when they get future pay rises, part of those pay rises will be diverted into their pension.
There is clear evidence that this approach works, and people gradually build up their rate of pension saving to a more realistic level. Without some additional prompt of this sort, millions of people are set to face a seriously disappointing retirement.
Steve Webb is director of policy at Royal London.