Context

Until the introduction of mandatory auto-enrolment in pension schemes, only 55 per cent of eligible workers participated in their workplace pension scheme. Since then, this has increased to over three-quarters of eligible workers. Minimum contributions for auto-enrolment in 2018 were two per cent, including at least one per cent from the employer, with further rises planned. With a membership of over six million across more than 600,000 employers, the National Employment Savings Trust (NEST) is one of the UK’s largest multi-employer pension plans.

The study

This 2018 insight report examines the enrolment, savings and investment activity of workers using data from the National Employment Savings Trust (NEST). The key aim of the report was to enable access to the huge amount of data held by NEST and the insights this data can provide to a wider audience.

The data included in the report are derived from NEST employer and member activity management information, and are managed by the NEST scheme administrator (TCS). To tackle the hugely complex issue of financial stability in retirement, NEST routinely prepare projections of future retirement wealth for members in the scheme, while publishing the results for transparency and to satisfy interest from a wider audience. These forecasts take into account a range of member characteristics, including age, income and scheme turnover, along with projections of future investment returns.

Key findings

• NEST’s membership is dominated by small firms, with 97 per cent having fewer than 50 employees. However, a large percentage of its individual membership is from larger firms. For example, although less than one per cent of NEST employers employ 250 or more workers, these firms actually account for 40 per cent of the scheme’s membership.
• Nearly half of all members are below the age of 35 and more than half have annual earnings of less than £20,000. The highest concentration of members is in urban areas, such as London and Birmingham, with membership also high in Northern Ireland.
• Retail and construction, health and social care, and catering and accommodation are the top sectors in the scheme, representing 28 per cent of the total membership.
• More than nine-in-ten active members (92 per cent) are automatically enrolled into NEST. Of the eight per cent who actively enrol in NEST, most are low income people who may not have saved for retirement at all – they are predominantly female, low earners and under the age of 25.
• Annually, six per cent of people ‘opt out’, while two per cent stop their contributions, with even fewer ending contributions each year through retirement or death.
• On the 31st of January 2018, 93 per cent of employers had enrolled employees at the minimum two per cent rate. Small employers dominate the seven per cent of companies who choose to pay a higher rate.
• Members have a median total contribution (net of fees) of £300 and an average of £394. As annual mandatory contributions increase, these numbers will also increase.
• Median and average balances are £300 and £450 respectively, with active members unsurprisingly having a higher balance. Males have a higher median balance than females (£228 compared to £174), though when incomes are controlled for, women are the highest contributors.
• Early projections show that a low-income 22 year old may generate an annual pension of £3,000 a year (at today’s value). While this will improve the adequacy of their income in older age, and replace some of their employment earnings, this amount is clearly some way short of what many will perceive as an adequate income in retirement.
• Assets invested through NEST total £2.6 billion as of January 2018. Almost half of these assets are allocated to equities, a quarter to investment-grade bonds, 13 per cent to property, with the remainder to growth credit and short-term reserves.
• Almost all members (99 per cent) are invested in NEST’s default investment strategy. As expected, switching activity is low, with less than one per cent of members changing their investment options in 2017.
• Almost all members (99 per cent) are in the accumulation phase of their savings. Of those who have retired, two-thirds have withdrawn money from their accounts.

Points to consider

• • It is important to note that this report does not include any data since the first phased increase in contributions, which took place in April 2018.
  • In a fast-moving regulatory environment, these findings will quickly become dated.
• • This report is relevant to all stakeholders, policymakers and those involved in financial advice who are interested in the defined contribution pension system and how policy, engagement and product design are reflected in member outcomes.
• • This report is based in a UK pensions regulatory environment, though may be of interest in other countries who may be looking to adopt a similar approach to tackle the problems presented by population growth coupled with under provision for retirement.