At NEST Insight, we recently launched the inaugural edition of How the UK Saves, with our strategic partners, Vanguard.
Many of you will be aware of the great success Vanguard’s Center for Investor Research has had with its other annual publications, How America Saves and How Australia Saves. For us, being offered the chance to get involved with the first edition of How the UK Saves really was a no-brainer. One of the key drivers behind establishing the NEST Insight unit was to find ways to share our rich store of data, and the insights they present, widely and freely. We’ve learned a lot from the experiences others have had around the world, and we hope that our research can now be similarly useful to others seeking to improve retirement outcomes for defined contribution savers.
If you’re yet to read the report, it’s well worth setting some time aside. The analysis spans hundreds of millions of individual data points, making it one of the most extensive studies of retirement savings published in the UK.
Five key highlights from How the UK Saves
The report highlights a number of themes and trends. These are my top five take-aways:
- NEST is fulfilling its mission, helping millions save for a more comfortable retirement
The data shows that NEST has achieved a high level of coverage across the whole of the UK, with members from across all industry sectors. In particular, the scheme is helping many lower and moderate earners to save for retirement, who were previously at risk of inadequate provision.
With auto enrolment still in its infancy, and initial contribution levels deliberately kept low, it’s not surprising that at present average account balances are relatively modest. However as people continue to save, and minimum contributions are gradually increased over time, these balances can be expected to grow rapidly.
If we take a look at projections, they indicate that a typical low income 22-year-old might generate an annual retirement income of £3,000 in today’s money when they come to retire. For those on lower and moderate incomes, who might otherwise expect to rely solely on the State Pension, and who would probably not be saving but for auto enrolment, this represents a very meaningful uplift in their retirement income and quality of life in retirement.
- Opt-outs remain low
The number of people opting out of auto enrolment has been unexpectedly low across the country, exceeding many commentators’ expectations prior to 2012. This is also reflected amongst the NEST membership, with ongoing opt-out levels of just 6 per cent. And, even amongst those who did opt-out, their reasons for doing so reveal something positive. Very few of those who did opt-out said they planned to rely on the State Pension which strongly suggests that the importance of private saving for retirement is increasingly understood.
- Data so far suggests re-enrolment is effective
Whilst the amount of data on re-enrolment is relatively small, and we can’t identify with complete certainty who is a re-enrolee, the figures so far are interesting. All of these workers initially chose to opt-out of the NEST pension scheme or ceased contributing. Yet, three years later, we estimate that 87 per cent of these re-enrolled workers stayed in.
If correct, these figures suggest that the three-year mandatory rule is effective in encouraging those who opt-out, or cease contributing, to resume saving in the pension scheme. The data also suggests that for many, the drivers of opting out on any given occasion are temporary and circumstantial rather than any systematic objection to retirement saving.
- A relatively high number of savers opted-in
The finding that more than 250,000 people chose to opt into the scheme voluntarily is really encouraging, particularly as this group tended to be young, female and with very low incomes, and may not have previously been saving for retirement.
- Women are saving more into NEST than men
While men have more money saved for retirement than women on average, this largely reflects that average female earnings are lower than men’s. When we adjust for earnings however, the data reveals that women tend to contribute more than men and have higher balances. Women earning £10,000-£14,000 a year for example contributed 26 per cent more, and had balances 20 per cent higher, than men on the same earnings.
Over time we hope that this annual publication will build to provide a rich and detailed understanding of how auto enrolment is working for our population of largely low to moderate income savers. Vanguard and NEST Insight share the aim of expanding this project in future years, including other UK pension providers so we can build up an even bigger, more representative picture of how the UK saves.
NEST Insight is a collaborative research unit set up by NEST Corporation to help understand and address the challenges facing NEST members and other defined contribution savers.
The full report is available here.