The Pensions Policy Institute has published a report looking at potential outcomes of increasing auto-enrollment contributions. Kim Kaveh explores the data.
Automatic enrolment (AE) has been rolling out for more than five years now, bringing over nine million into a workplace pension.
Since the initiative came into force, minimum contributions have rested at 2%, but this will increase to a total of 5% in April this year, and 8% in 2019.
The AE review, which was published at the end of last year, stated the government will continue to monitor and evaluate the impact of increasing contributions and will carry out further analysis to inform a longer-term debate on the right balance between statutory contribution rates and voluntary additional retirement savings.
A report produced by the Pensions Policy Institute and sponsored by Standard Life Aberdeen - The Impact of the Introduction of Automatic Enrolment on Future Generations - examines the impact of AE on millennials and future generations.
In particular, it considers how much they can expect at retirement depending on their total contribution levels throughout their working life.
According to the report, millennials make up around 40% of the target group for AE.
The individuals aged between 22 and 35 were modelled stochastically by performing runs using 3,000 scenarios of possible future economic outcomes and investment returns.
The results were presented as the median outcome of the stochastic runs, with distributional results highlighting the quartile outcomes. The study commenced in April 2017 and concluded in February 2018.
Median fund value
One part of the study demonstrates the median fund value at state pension age (SPA) of 68 (in 2017 earnings terms) from saving at the AE minimum of 2%, 8%, and 16% total contributions from the age of 22.
It shows that an older millennial called 'Tom', aged 35 in 2017 - assumed to earn £34,000 per annum (pa) at the age of 40 - could have £79,725 in his pension pot at SPA under AE minimum contributions of 2%. This increases to £116,269 with a total of 8% contributions, and £232,537 with 16% contributions at retirement age.
Meanwhile, the younger millennial 'Jack' - who would have been 22 years old in 2017 and is assumed to earn £34,000 pa - could have £107,790 in his pot at retirement with a 2% contribution. If he contributed 8%, he could have £137,054, or £274,108 with a 16% total contribution at retirement.
Meanwhile, lower earner 'Jem', aged 27 in 2017, who is assumed to earn £19,000 at the age of 40, could have £51,683 at retirement with 2% total of contributions, £86,915 with 8%, and £173,831 with 16%.
However, higher earner 'Ruth', aged 27 in 2017, and assumed to earn £49,000 pa at age 40, could have £158,112 with a total of 2% contributions, £213,123 with 8%, while 16% could generate £426,245 at retirement.
Possible fund values
The study also demonstrates the distribution of possible fund values - meaning higher contributions can result in a higher range of outcomes than under AE minimum contributions.
The possible outcomes in this scenario are as a result of better or worse than expected investment returns, and modelled using the same PPI economic scenario generator.
For example, Ruth - the high earning female in the presented scenario (£158,112 with 2% contributions) - has a 10% chance her outcome will be above £261,542 with 2% contributions, and a 10% chance it will generate a £97,000 pot.
However, if she contributes 16%, there is a 10% chance her pot could increase from £426,200 to £723,130.
Commenting on the results of the study, Standard Life head of pensions strategy Jamie Jenkins, who was one of the three chairs of the external advisory group of the AE review, says the focus now needs to be taken away from enrolling members, and shifted towards getting them to increase contributions.
"We need to build a reference point as to what a workplace pension actually means, and to think about how the industry frames AE with people.
"We are currently at the cusp of a great nudge experiment, and we need to keep our focus on it."
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