The UK has recently embarked on the most radical reform of pensions in recent memory, with all employers now obliged to automatically enrol most of their employees into a workplace pension.Since the state will increasingly struggle to pay the rising cost of supporting an ageing population in its retirement, the idea is to make saving into a pension the default status, rather than something that people have to actively choose to do. Last year, our research studying 50 of the first employers to implement this policy suggested that it had mostly been a success: despite speculation that up to a third of workers would opt out of their pension scheme, our research showed that in fact, only around 9% ended up opting out.
Of course, this is not to say that those who stayed in their workplace pension are saving enough: on the current minimum contribution rate, your employer puts in 1% of your salary and you also put in 1% – a figure that is unlikely to buy everybody a villa in the Algarve, even when it has risen to a combined minimum contribution of 8% in 2018. Nor is it to say that everybody who opted out is condemned to poverty: as part of our research, we also spoke to workers who opted out, and many were in fact saving via other means.
Interestingly, a recent piece of research by the Strategic Society Centre and the Institute for Social and Economic Research at the University of Essex came up with a similar figure of 11% of workers who were offered the possibility of saving into a workplace pension and chose not to do so. However, their research was carried out over 2006-2010, before the introduction of automatic enrolment, among workers who were offered a pension on an opt-in basis. This therefore suggests that some people have consciously decided that workplace pensions are not for them, regardless of whether they are ‘nudged’ into them through automatic enrolment.
The question is what people are doing with that portion of their pay that’s more important to them than saving into a pension. The Strategic Society Centre research suggests one possible answer in its finding that workers who were tenants were much more likely to reject saving into a workplace pension than those on the property ladder. It seems reasonable to assume that not all tenants are simply too poor to save for retirement, full stop, either in a pension or using another vehicle.
From our research with workers who have opted out from automatic enrolment, we know that there are also some young people who are using their spare income to save for a deposit for their first home, instead of locking it away in a pension. This intuitively makes sense: as a goal, it’s more immediate, it’s more tangible, and it functions as a symbolic landmark that that we strongly associate with this life-stage. What’s more, if property prices keep rising, it’s an investment in its own right – one that currently looks attractive compared to the low return on most savings and investments. So much so, that Castle Trust is now launching a product that links returns to the Halifax house price index.
The problem is that because house prices keep going up, it’s getting harder and harder for young people to reach that landmark of buying their first home. And as the age at which people buy their first home rises, so too the age at which they start saving for retirement is likely to rise. With other expenses, such as raising a family, often kicking in at this same life-stage, it seems likely that some people are simply going to run out of time and budget to save sufficiently for their retirement.
But to come full-circle, another pressure on the availability of affordable housing is the fact that people are living longer and therefore occupying their homes for longer. It’s difficult to guess how far this will impact on the ability of future generations to buy their first home at a reasonably young age – when they still have time and budget left to re-prioritise saving for retirement. Nevertheless, it will be interesting to see how this relationship between tenancy and pension saving develops. How far could more homes go towards nurturing a savings culture among future generations?