It’s been six years since the launch of auto-enrolment in 2012. And with the final staging date now passed, many employers will have automatically enrolled their eligible employees into a workplace pension.
In April 2018, the auto-enrolment minimum contribution level increased to 5% and will increase to 8% of Qualifying Band Earnings (QBE) in April 2019. However, this rise in contributions still won’t guarantee a comfortable income in retirement for many people.
Debunking the myth
Defined contribution (DC) schemes are often seen as a less generous offering compared to defined benefit schemes – but is this perception fair? When contributions are adequate, schemes are well-run and members are guided to make the right choices at retirement, a DC scheme can ensure good retirement outcomes.
Unlike a DB scheme, the level of retirement income a member will receive through a DC scheme will depend on a number of factors. Research shows that in DC schemes, what matters most to achieving good member outcomes is:
- level of contributions
- investment choices and
- decisions made at retirement.
For example, a member is much more likely to achieve their goals if they start contributing early, invest regularly, make good investment choices and make the right decisions when they retire.
Start early and save for the long term
Encouraging members to start saving earlier can improve their pension outcome. A study published in February 2018 by the Pension Policy Institute (PPI), in collaboration with Standard Life, shows that an 18 year old could achieve a pension pot worth 4% more if they were to start saving immediately rather than waiting four years to be auto-enrolled.
Maintaining regular contributions throughout a member’s employment is also important if they want to improve their pension outcome. If there’s a gap in contributions – taking a career break for example – it can reduce a member’s ability to build up their pension savings.
The PPI estimates that a career break of 10 years for a low earner aged between 30 and 39, could reduce their pension pot by 30%. Of course, the impact of a career break on an individual will depend on the level of earnings lost during the period of the career break.
The PPI also finds that saving for five years beyond the State Pension Age can increase the amount of a pension pot. A high earner aged 27 in 2017 could increase the value of their pension pot by 14% by saving for five or more years. However, this requires members to be in a position to continue to work, which isn’t always easy.
We know employees need support, guidance and education at the right time in their lives. That’s why Standard Life’s communication programmes support specific life events.
Keeping an eye on investment confidence
A Standard Life Employee Wellness Survey conducted in 2016 highlighted that members had gaps in their knowledge when it came to their investments. 66% said they wanted a better understanding of the difference between saving and investing, and 40% weren’t aware they could choose their investments based on a level of risk that matches their needs.
A quantitative survey conducted by Standard Life in 2017 also found that members were worried about their investments, with 59% expressing concern that their pension investments could go down in value. 52% also stated that they weren’t aware they could choose how their pension was invested at any point.
Making it easy to invest
There’s a range of investment options designed to help members understand risk and help them choose investments that are appropriate for them. Intelligently designed investment options are an important component of a DC scheme and can make members feel more confident and ultimately help them save more.
At Standard Life, we offer a range of investment options that aim to deliver the highest possible return for a given level of risk. We also offer plenty of information to help members understand the level of risk they’re prepared and able to take, so they can choose an option that’s right for them.
A pension is an investment that can go down as well as up in value and it’s possible it could be worth less than was paid in.
Important decisions at retirement
When and how members access their pension pot is an important decision as they’ll need enough money to last throughout their retirement.
Standard Life’s 2016 Employee Wellness Survey found that 70% of members wanted to know more about options to access their pension pot in retirement and 76% wanted to know how to make money last in retirement.
It’s key that members understand what their retirement options are so they can determine what will benefit them most. Supporting them to make the right choices can lead to better outcomes.
At Standard Life, our retirement solutions are designed to help members make the most of their retirement options and support them with their choices every step of the way.
A holistic approach
It’s essential to look across the full lifecycle of a DC membership. From contributions and investment choices, to the options available at retirement – every point in the journey is important to help members achieve good outcomes at retirement.
The views expressed in this blog should not be regarded as financial advice.