The Pensions Policy Institute’s Daniela Silcock unpicks the organisation’s latest research

Sweeping reforms are bringing about changes in terms of who is saving for retirement and what type of pension they’re saving into. These in turn will affect the type of savings future workers reach retirement with, and how these savings are used in retirement.

Automatic enrolment is bringing pension saving to groups not previously given much help to save, such as workers whose employers did not previously provide access to a workplace pension.

Prior to automatic enrolment only 55% of those who would now be eligible for automatic enrolment were saving into a workplace pension scheme.

The government estimates that around 11 million people who were not saving will have been automatically enrolled by 2018, and though some of them will make use of their right to “opt out” of their schemes, the vast majority so far, 90%, have chosen not to. Employers are also responding well, with many larger employers maintaining existing provision for pre-automatic enrolment members and some employers extending existing provision to new members.

Between 6.5 and 8.5 million people could be newly enrolled into private sector workplace pension schemes by 2018

New PPI research finds that, assuming an average opt-out rate of between 9% and 25%, between 6.5 and 8.5 million people could be newly enrolled into private sector workplace pension schemes by 2018.

The majority of these people will be enrolled into defined contribution schemes and the active membership of DC pension schemes could double, rising to between 12.5 and 14.5 million by 2030, compared to around six million in the absence of automatic enrolment. 

As a result, the total value of DC scheme assets could range between £455 and £495 billion (2014 earnings terms) by 2030. Compared to £350bn in the absence of automatic enrolment. Meanwhile, active membership of private sector defined benefit schemes could decline to around half a million members by 2030.

What this means is that in the future, the vast majority of private sector workers will be reaching retirement with DC savings. And as a result of the changes announced in Budget 2014, the level of freedom they have regarding how to use those savings will dramatically increase from April next year.

People will be able to access their retirement savings in lump sums, without restriction, which constitutes a great change from the more traditional retirement income platforms of an annuity, which provides a guaranteed income for life or, for DB scheme members, a guaranteed and escalating income provided by their employer.

The challenge ahead of government, industry and other organisations interested in pensions policy, is to ensure that future generations of pensioners are equipped to manage new, more flexible, but less guaranteed, savings and income in retirement.

Daniela Silcock, Senior Policy Researcher, Pensions Policy Institute

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