Aon senior consultant Steven Leigh says that while auto-enrolment has been branded a huge success the real test is whether people can retire at a reasonable age.
When employers introduced DC pensions, outcomes were often the last thing on their mind. For some, DC was all about controlling pension costs: they were moving away from costly DB provision and the member would be the one to worry about outcomes. At the other end of the scale, some employers looked to mimic their DB provision with a range of age- and service-related contribution structures which aimed to deliver a specific proportion of earnings at retirement. Unfortunately, changing economic conditions meant that most of the latter types of DC design are now not able to deliver to their original targets.
Auto-enrolment meant that employers understandably became even more focussed on what was being paid into DC, questioning; how much would it cost, how many would opt out, would the existing contribution rates be sufficient throughout the phased rollout of minimum levels? Possibly, how much do our competitors contribute for their employees?
Auto-enrolment has been branded a huge success in terms of the increase in pension coverage; an extra 10 million employees at last count. However, it will only be viewed a success from a future perspective if people have a sufficient level of pension savings to enable them to retire at a reasonable age.
Over recent years, many retirees with DC pensions have also had DB plans from previous service, meaning that the value of the DC element is less critical in their overall retirement planning. This is set to change. The Aon 2018 DC and Financial Wellbeing Member Survey1 found that a third of employees expect their DC pension to be insufficient to maintain their current standard of living in retirement.
The impact of this is that people will need to retire later, or perhaps not at all. This was shown as part of the same research, where Aon found that over 50% expect to retire after age 67, 25% expect retirement from age 70 or later and over 14% (or 1 in 7 people in DC pensions) expect never to retire. As a result, employers are focusing more on pension outcomes and what they can do to support employees in saving enough for an adequate retirement. This is not just a paternalistic issue; companies also need to consider succession planning and how they would have to adapt job roles and working patterns to accommodate an aging workforce.
There are certainly benefits to retaining experience in the workforce, and there is an example of a certain German car manufacturer that has redesigned a factory specifically for employees over 50 (including slower assembly lines, seating and softer flooring). However, there is a difference between those who choose to continue working at later ages and those who simply cannot afford to retire.
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