The government wants us to save for the future. It makes sense. We’re living long lives and we need to plan for our financial futures if we are going to be able to live more comfortably when we retire. Pensions can be complicated and difficult to understand and, up until a few years ago, people were often asked to actively opt-in to a pension scheme and as such it had a low level of take up.
Things changed with the 2008 Pensions Act, when ‘auto enrolment’ was regarded as the best way to counter apathy and persuade people to get saving. Larger companies started the process back in 2012. Small and micro businesses, employing from one to 50 people, had to have everybody enrolled by February 2018 at the latest. The levels started small with minimum auto-enrolment contributions of 2% (split equally between employee and employer). In April, this year, it rose to 8% (5% employee and 3% employer).
It is estimated auto enrolment has lead up to 10 million people to start saving for their retirement for the first time. This is great news for individuals and society, long term, but for retailers, already seeing sales fall, it is less money in people’s pockets and reduced spending power.
This has all been a long time coming. But, it’s still not enough. People will need to save an even higher percentage of their income. In 2017, the Pensions minister, Richard Harrington, set a target for savers to achieve a £250,000 pension pot by the time they retire. To reach this target, an individual whose salary builds up to £27,000 over their career and saves for 40 years with no breaks would need combined employee and employer contribution levels of 25% says research for Citywire's New Model Adviser® by pensions provider Aviva.
The statutory contributions rate looks like it will rise further, no firm plans have been set just yet, but are we starting to see the affects this new level of saving is having on retail sales?
September 2019 saw the worst retail sales figures since British Retail Consortium (BRC) records began in 1995. Sales decreased by 1.3% in September. Sales decreased by 1.7% on a Like-for-like basis from September 2018, when they had decreased 0.2% from the preceding year. The BRC said the “spectre” of a potential no-deal Brexit is weighing on consumers’ purchasing decisions, but surely higher levels of minimum pension contributions are resulting in lower retail sales?
Pension provider Royal London produced research looking into what would happen if someone who has only contributed the minimum to their pensions under government 'auto-enrolment' rules, decides to draw a state pension as soon as they can and immediately cuts down to part-time work. Royal London defines a ‘gold standard’ retirement - income at retirement is two-thirds of pre-retirement levels - or a ‘silver standard’ retirement - income is half of pre-retirement levels. Someone pursuing a flexible retirement would have to work until they are 79 to achieve the ‘gold standard’. The age comes down to 74 for a worker who defers taking a state pension and maintains full-time hours until they stop working. A worker targeting ‘silver standard’ retirement but who retires gradually would have to work on until they were 69 – or 68 if they defer their state pension and continue in full-time work. The report encourages workers to contribute more than the legal minimum of 8% (combined employee and employer contribution) to a workplace pension. It said a 10% rate allows an individual to retire around three years earlier, while a contribution rate of 12% allows an individual to retire around six years earlier than if they contributed just the minimum
The older you are when you start to save, the higher the contributions will have to be. So someone starting aged 32 should contribute 16% of their salary for the rest of their working life. While 16% may seem a huge commitment, this figure includes your employer's contribution. All employers must 'auto-enrol' their qualifying employees in a workplace pension. Qualifying employees are those that are aged between 22 and State Pension age, earn more than £10,000 a year and work in the UK.
According to a report by Scottish Widows, the average income that people state they will require for comfortable retirement is £23,000 a year and it recommends that 12% of income should be channelled into a pension throughout your working life.
Almost 50 per cent of workers are still not putting away enough to meet those expectations. In 2015, one in five weren’t contributing anything to any pension at all and out of 6,000 workplace schemes more than 5,000 were in deficit. Figures from the Pension Protection Fund in May 2016 showed that the shortfall was a colossal £300 billion.
“In future contribution rates are going to rise. There’s a consensus in the industry that even when we get to 8% that’s still not enough. That can’t be the end and we must not rest on our laurels.” says Emma Douglas, Head of Defined Contribution at Legal and General, told ‘Smart Pension’, a company founded by experienced finance & technology professionals and designed specifically to support UK businesses faced with the challenges of auto enrolment.
“We will need to raise awareness about the importance of saving enough to provide a really comfortable retirement. There may be some pain to come, but I think that once people see their pension pot growing there will be acceptance and engagement. We need to make sure pension statements are transparent and easy to understand.” she says. “Overall, I think auto enrolment has been very positive.”
Tom Selby, senior analyst at AJ Bell told Moneywise: “To put it into perspective, someone earning around £27,000 and paying in the auto-enrolment minimum will see their personal contribution rise from about £500 this year to more than £850 in 2019/20.”
£850 for somebody on a £27,000 income is a chunk of money. It could be a month’s rent. Looking at Millennials and Generation Z already spending significant amounts of their incomes on renting and paying pack student loans, it will put more of a squeeze on their already reduced disposable incomes.
“While for most people this is still not enough to enjoy a comfortable retirement, we are now getting to the stage where some reluctant savers could start to feel the pinch. Rising average pay should help ease the pain, but anyone missing out on a salary hike could well be tempted to prioritise spending today over saving for tomorrow.” he says.
People can choose to opt out at any time. “Anyone thinking of quitting their workplace pension needs to understand that they will be losing out on both tax relief and their employer contribution, which put together double the value of the money they put in. Put another way, opting out of your pension is a bit like taking a voluntary pay cut – so nobody should do it lightly!” he says.
According to Jenny Condron, the ACA's (Association of Consulting Actuaries) chairwoman, this phased increase in contributions is needed to ensure that many more people save sufficient amounts, for both an adequate retirement income and one where they have real choices to spend some of their accumulated savings, as they approach or reach retirement.
She said: “Actions are needed to draw more of those on lower incomes and the self-employed into auto-enrolment levels of contributions, beginning with the gig economy’s quasi-employers.
“Then, from 2025, with due notice having been given, there is the need to gradually phase in rises in total contributions until they reach 12-14% of earnings.”
Minimum contributions were increased overall from 2 to 5 per cent in April 2018, which for 85 per cent of employers didn’t have an adverse impact on scheme participation, the ACA said.
It’s obvious that those on lower incomes have always saved less for their retirement. They are also more sensitive to the increased contributions. Putting 12%-14% of earnings into a pension pot will be difficult for many and sacrifices will have to be made if they decide to stay in the scheme. It could see increasing numbers of people opting out or a marked decrease in disposable incomes. People on lower incomes will have to make a difficult choice. This is very large group of people who weren’t saving before.
More stats show how retail is seeing sales fall. IMRG Capgemini Online Retail Index showed a drop of -22.5% in menswear digital sales year-on-year for September, with overall clothing sales seeing its first negative growth in over two years. Womenswear, footwear and accessories also declined with year-on-year growth rates of -13.3%, -9.8% and -9.0% respectively.
Auto enrolment is a fantastic idea for people’s long-term financial futures. Contemporary retail is in a perfect storm and auto enrolment pensions encouraging an estimated 10 million people to save at least 5% (& rising) of their income for the first time will only increase the squeeze and could be an extra of contributing factor to the current retail malaise. Will the British go from spenders to savers? Retailers will hope not.
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