In days gone by, neither a cost of living crisis nor market turbulence would have affected most workers when it came to their pension plans. Members of defined benefit (DB) schemes could leave their employer to worry about the ups and downs of inflation and interest rates.
And cost of living pressures would have had to be pretty acute to lead them to give up their workplace DB benefits and associated employer contributions.
But in a world of defined contribution (DC) pensions, this last year has been a test of how savers will react when their incomes are squeezed and/or their pension pots are shrinking. And the emerging evidence suggests some quite surprising findings.
The vast majority of new savers under automatic enrolment are being enrolled into a DC pension. Many will have little previous pension saving and may have little knowledge of them. There was therefore a real risk that recent events could have fatally undermined this whole project.
Despite a global pandemic, war in mainland Europe, a surge in inflation and highly volatile markets, roughly nine in 10 people put into a pension stay in one. This points to a remarkably robust system.
The reality turns out to have been rather different, at least for those some distance from retirement.
The first risk was that people would simply ‘opt out’ of pensions when starting a new job. But despite some scare-mongering stories in the press, there is very little evidence this has happened at any scale.
According to analysis published by the Department for Work and Pensions, in August 2022, the proportion of newly enrolled employees who opted out of their workplace pension was 10.4% compared with 7.6% in January 2020. Although this increase is unwelcome, the absolute rate is still astonishingly small.
The last couple of years included a global pandemic, war in mainland Europe, a surge in inflation and a period of highly volatile markets. Yet roughly nine in 10 people who are put into a pension by their new employer will stay in a pension. I would say this points to a remarkably robust system.
A second source of concern would be if those who have successfully been enrolled into a workplace pension subsequently stopped saving. This is known as ‘cessation’ (rather than opting out), and some of it is simply natural ‘churn’ as people change jobs or retire.
Remarkably, in August 2022, the rate of cessation stood at 3.1%, exactly the same proportion as in January 2020. This is truly astonishing and reflects, among other things, the continuing power of inertia.
Policymakers’ attention should be focused on what is happening in later life, where there is more of a risk of people doing long-term damage in response to short-term pressures
All of that said, there are some signs that cost of living pressures and concerns over volatile markets are being seen among one particular group, namely the over 55s.
HM Revenue and Customs publish quarterly figures on ‘flexible’ pension withdrawals subject to income tax. In Q2 2021, just over 400,000 people made withdrawals worth £2.9bn. A year later, in Q2 2022, just over 500,000 people made withdrawals worth a total of £3.5bn. This is a year-on-year increase of 23% in the amount being taken out and is the highest ever level of withdrawal, which must be a source of concern.
Finally, something I have observed from listening to members of the public is that recent market turbulence has dented their confidence in DC pensions. Some are angry or confused about the falls in the value of their DC pot this year and are wondering either whether to ‘get out of the market’ to avoid further falls or whether to cash out in full at the age of 55. It is probably too soon to see this fully reflected in official figures, but it is a potentially worrying trend.
In short, talk about people opting out on joining a new firm or leaving their workplace pension because of the current financial situation is probably overblown. Instead, policymakers’ attention should be focused on what is happening in later life where there is more of a risk of people doing long-term damage in response to short-term pressures.
Steve Webb is a partner at consultants LCP
This assumes that AE has passed some hurdles successfully. Yes, they have inveigled large numbers into what has proved to be a very sub-standard product. The whole thing is based on the premise that any pension is better than no pension – even if it loses you money. I wonder what effect Consumer Duty will have on this woebegone product? Will customers actually get some decent one on one advice?