Will auto-enrolment reduce pension poverty?

It is hoped that auto-enrolment will encourage workers to save for their latter years and prevent poverty. Allan Maxwell asks if this will actually be the case.

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The Institute of Fiscal Studies (IFS) report published today suggests that there has been a substantial reduction in the numbers of pensioners living in poverty.  This is certainly great news, but I am unsure whether we can expect this trend to continue.

“While it is great news than pensioner incomes are improving, the recent trend to reduce pension contributions must be reversed”

We will only see the trend continue to improve if those individuals who are currently members of pension schemes retire on similar levels of pension and if more individuals join pension schemes.

It is likely that the figures are heavily influenced by large numbers of individuals recently retired from final salary pension schemes, particularly in the public sector.  The trend since the mid 1990s has been to close final salary schemes to new entrants.  This means that new and younger employees have been joining money purchase pension schemes, which have predominantly been of inferior quality.  The impact of this is that pensions are likely to be lower in future.

The introduction of auto-enrolment should see an increase in the number of pension-scheme members.  But it is expected that some employers will take advantage of the lower statutory contribution level to reduce their pension costs further thus reducing the level of pensioner incomes in future.

There is, therefore, no room for complacency. And while it is great news than pensioner incomes are improving, the recent trend to reduce pension contributions must be reversed.  Auto-enrolment is a start, a move in the right direction, but no more than that.  Not only must pension contributions rise to a much higher level, the need to make provision for retirement must rise to a higher much higher level in the public consciousness.

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