During the past decade, many changes have been made to the UK retirement savings environment. These changes include requiring private-sector employers to enrol most employees into a workplace pension, and the increase in the UK state pension age.
The IFS – Retirement Saving Consortium and the Economic and Social Research Council published two new reports studying how individuals’ retirement-related attitudes, expectations and behaviours have changed over the last decade.
More private-sector employees have become pension members since 2012 due to the increased availability of employer-arranged pensions and employees are enrolled in a workplace pension membership by default.
The defaulting effect is particularly powerful and has resulted in pension membership now being much more similar across groups of employees.
The young, those on lower wages and with lower education, and those in rented accommodation had seen a significant increase in workplace pension membership since 2012 when automatic enrolment was first introduced – more specifically from 42% in 2012 to 85% in 2018.
Much of the increase in pension membership is among employees who appear financially secure and therefore represents a policy success.
Automatic enrolment also boosts pension membership to very high levels among those who appear less financially secure.
Nevertheless, the power of such defaults should be implemented carefully as those who have less than £1,500 in liquid wealth, those who have a relatively low income and even those who are behind on some important bills may be better off not saving in a pension at the moment.
Furthermore, it was found that 21% of men and 20% of women aged 40–54 in 2016–18 expect to retire at 67-years old, compared with less than 1% of such men and women a decade earlier.
The study also found that the average age at which men and women aged 40–54 expect to retire increased substantially between 2006 and 2017: by 2.1 years (from 62.9 to 65.0) for men and 2.4 years (from 61.7 to 64.2) for women.
This increase in expected retirement ages is most likely a response to increases in the state pension age, which was 67 for those aged 40–54 in 2016–18 but 65 or 66 for those aged 40–54 a decade earlier.
The increase in expected retirement ages is similar across those working in different sectors, those with varying levels of health and those with different private pension arrangements.
Although both men and women have the same state pension age, women on average expect to retire earlier, by almost one year (at age 64.2 compared with 65.0).
In 2017, 53% of people were more confident that their income during retirement will provide the standard of living they hope for; this is up by 11 percentage points from 42% in 2008.
A similar pattern of increased confidence is observed across both men and women, those working and not working, and those working in the public and private sectors.
The amount of private-sector employees expecting to receive a private pension in retirement has increased from 63% in 2013 to 73% in 2017.
This implies automatic enrolment has not just led to people who always intended to save in a pension doing so earlier but has also boosted the numbers who expect to save in a pension.
It was also found that many new members are expecting to receive less from a workplace pension than from at least one other source, such as the state pension.
The extent to which individuals report they ‘understand enough about pensions’ has remained relatively unchanged in recent years which suggest to the role of defaulting, rather than changes in individuals’ decision making, driving increased pension membership.
Pascale Bourquin, a Research Economist at IFS and an author of one of the reports, said:
Automatic enrolment substantially boosted workplace pension participation. Much of the increase has come amongst employees who appear to be relatively financially secure and is therefore likely to be a good thing – this is automatic enrolment doing what it was designed to do.
Some of the increase in pension participation comes among those who appear to be financially insecure and who may, in fact, benefit from opting out of their pension scheme in favour of more take-home pay today. While this is a relatively small group, it is potentially worrisome, and highlights that defaults can have very strong effects and should be set with caution.
Rowena Crawford, an Associate Director at IFS and an author of the other new report, said:
The last decade has seen a striking increase in the ages that those aged 40 to 54 expect to retire. This suggests that increases in the state pension age are being noticed and, at least by some, reflected upon – especially given that, for the first time, significant proportions report that they expect to retire at age 67. It will be interesting to see whether future generations reaching these ages expect to retire later still, given plans to increase the state pension age further.
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