Nearly 40 million workers are members of a pension scheme, according the latest figures from the Office for National Statistics. As of the end of 2016, total membership of workplace pension schemes topped 39.2 million, the highest level of record, rising 17.1% over the year from 2015. Of these members, 13.5 million are active members, meaning they are currently paying into a workplace scheme.
Private sector defined contribution (DC) scheme membership – where a retirement income is determined by the contributions made by the individual over the course of their employment – rose by an incredible 62.5% to 6.4 million.
This is thanks to auto-enrolment, the Government initiative designed to provide every employee with a pension. By the end of 2018, all companies with more one employee will have to provide a pension. The average contribution rate for these private sector DC savers was 4.2% of salary; some way off the 8% target rate needed to ensure a comfortable retirement.
Next year, the minimum total contribution required from employee and employer will rise from 1% of salary, to 5%. This will rise again in 2019 to a total contribution of 8% of salary – 5% from the employee.
Tom McPhail, head of policy at Hargreaves Lansdown said: “More and more people are saving for retirement, which is great news but the data also shows how much work there is still to do. Average contribution rates will have to rise, and that isn't going to be popular; more work also needs to be done on making it easy for people to take control of their retirement savings.”
There is some concern that when minimum contribution rates rise, some workers will opt out of workplace schemes – especially those on lower salaries who benefit most from auto-enrolment.
Eleven million workers are estimated to be eligible for auto-enrolment, of which the Government expects 10 million will be newly saving into a scheme as a result of the initiative by the end of 2018 – resulting in a total £17 billion extra saved every year by 2020.
New Savers Mostly Private Sector Workers
Active membership, that is, savers contributing to a pension scheme, rose to 13.5 million in 2016, up from 11.1 million the year before according to the latest ONS figures. The bulk of these members are employed in the private sector, rising from 5.5 million in 2015 to 7.7 million last year. The number of workers employed in the private sector and actively saving into a pension has now surpassed those in the public sector for the first time, 7.7 million to 5.7 million.
Chris Noon, Partner at Hymans Robertson said auto-enrolment had clearly been a success in increasing the number of people saving for retirement.
“The challenge now is to ensure that we don’t see significant numbers opting out over the next couple of years as minimum contributions increase to 8% of pay in April 2019. Even if we can avoid high levels of opt-out, at 8% of pay, minimum contributions will not be sufficient to provide adequate incomes in retirement,” he said.
“Ideally, we need to see overall saving rates in excess of 15% of pay and begin to set expectations of working lifetimes.”
