UK - The planned introduction of auto-enrolment in UK pensions could increase defined contribution (DC) assets from £600bn (€654bn)to as much as £900bn by 2050, according to the Pensions Policy Institute (PPI).

In its latest report, ‘Retirement Income and Assets: How Can Pensions and Financial Assets Support Retirement? the think tank claimed the UK’s 2012 reforms will “significantly alter the retirement income landscape in the UK”.

It believes the implementation of auto-enrolment - with minimum levels of contributions from employers - is likely to lead to a more “pronounced shift” from defined benefit (DB) to DC, with projections estimating DB membership will fall by 40% to 1.5 million active members by 2050, while DC active membership could more than triple from five million to 17 million in the same period.

The PPI noted in its 70-page report that around 40% of the UK’s working age population, around 14 million, are saving in a private pension - this includes schemes provided by both public and private sector employers and those provided by financial service companies - but said auto-enrolment could lead to a further seven million saving in a private pension, allowing for opt out rates. So after 2012 the proportion of workers with private pension saving could rise to 60%, or 21 million.

However, while the number of people saving is likely to increase, the PPI warned that actual levels of saving could fall depending on how employers respond to the reforms and the compulsory contributions of 3%.

Without reform it is estimated private pension saving will fall from £40bn to £30bn by 2050, on the basis employers close DB schemes in favour of DC. Under the reforms the PPI’s best scenario is if employers auto-enrol staff into existing schemes at existing rates, and employers without an existing scheme choose personal accounts, at which point total pension contributions would rise to £40bn by 2050. 

Alternatively, if all employers level down to the minimum personal accounts level of 3% contribution, total pension contributions could be £10bn lower in 2050 than if there were no reforms.

The PPI highlighted that the reaction of the employers to the reforms will also determine the amount of assets held in DC pension schemes in the future.

Currently, it claimed, there is around £600bn of assets under management in DC pensions, and without reform this could grow to £700bn by 2050 through the natural decline of DB schemes. Under the four scenarios modelled by the PPI - auto-enrolling on existing terms; controlling costs; likely responses; and minimum terms - if all employers implement the ‘minimum terms’ scenario and stick at 3% contributions DC assets would still grow to around £700bn.

In contrast, if employers auto-enrolled staff on existing terms then the funds under management could grow to £900bn by 2050, and in the other two scenarios DC assets would rise to around £800bn.

But the PPI warned that an increase in DC pension savers will lead to a greater number of annuitants, which could lead to further pressure to end the system of compulsory annuitisation at age 75.

Chris Curry, research director at the PPI, said: “Greater reliance on DC pensions in the future will mean that many more individuals will be exposed to the risks of investment performance and will need to convert pension pots into retirement income and engage with the annuity and retirement products market.”

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