Is auto-enrolment ensuring an adequate retirement for everyone?

Overall, we’re in a considerably better position than we would have been had auto-enrolment not been implemented. However, problems persist, particularly for Generation X and millennials.

Forecasting the required income and attainable lifestyle

With the help of analysis from the Pensions Policy Institute, we examined existing pension savings for thousands of people and utilised the data to generate realistic pension forecasts¹ for everyone at state pension age. The anticipated retirement earnings were then compared to broadly recognised definitions¹ of an appropriate retirement income. As our benchmarks, we used the Pensions Commission’s target replacement rates² and the PLSA’s retirement living standards.³ The replacement rates represent the expected proportion of work income required in retirement, whereas the PLSA standards estimate the lifestyle you may afford with a certain income.

A baseload retirement income

Policymakers understood from the start of auto-enrolment that saving 8% of band earnings and the state pension would not provide a suitable retirement income.² This is supported by our research. Auto-enrolment is performing as planned, providing the millennial group with a baseload retirement income that falls short of the primary adequacy measures previously mentioned.

It’s hardly surprising that our research reveals that just 27% of millennial households are on course to meet their target replacement rate – two thirds of a typical median earner’s pre-retirement income. Retirement income projections for millennials are lower than those for Generation X and baby boomers, but millennials have more time to save if they wish to or if auto-enrolment is reformed.

The outlook for baby boomers and Generation X

The situation is different for baby boomers and for Generation X. Both groups’ projected retirement earnings are, on average, higher than millennials’.

Far more baby boomers are on course to earn an adequate retirement income, but headline figures mask the disparity. According to our findings, 60% are on track to meet their target replacement rate. This is mostly owing to the presence of defined benefit (DB) pensions, typically extremely large DB pensions, which are less prevalent in other generations. The outcomes are predictably worse for individuals of the boomer generation who did not have access to workplace savings during their working life. For these people, auto-enrolment has arrived too late. It means they won’t rely only on the state pension, but it likely won’t get them close to an adequate income.

Meanwhile, Generation X is in difficulty, with our research showing 35% of households on course to hit their target replacement rate, according to our research. While Generation X’s projected retirement incomes are larger on average than those of millennials, many more are significantly below the Pensions Commission’s target replacement rate. They most likely do not have enough time to make up lost ground because they did not save enough previously. The research substantially confirms the notion that Generation X has been stuck between the elimination of DB and the implementation of auto-enrolment.

The argument in favour of increased contributions will have to wait

So, what next? It’s obvious that with inflation high and a deep recession forecast, no one should be contemplating increases in statutory minimum contributions in the short term. Realistically, we are looking at a pause until economic normality returns. If there is a case for higher contributions, it’s going to have to wait. The pension sector should use this pause to  engage with policymakers, discuss next steps, and build a consensus that runs wider than the pension industry. 

Setting explicit goals for the pension system

We also believe it is crucial that policymakers and stakeholders agree on a set of objectives for what the pension system is meant to accomplish before recommending a solution to the issues we’ve highlighted. The Pensions Commission of 2005 contended that the system, which consists of a reformed state pension and auto-enrolment, purposely delivers results below the adequacy threshold for the majority of people.² And that is what the policy is currently designed to deliver.

We don’t think there is much mileage in pointing out that higher contributions will deliver higher retirement incomes without gaining a consensus on what the pension system as a whole should be trying to achieve. Setting objectives for the system would enable a debate about what the right level of saving is for different groups, we should be explicit about what level of income the pension system should target for the average individual. That should enable a much more constructive debate about whether we are getting auto-enrolment right.