workplace pensions, second edition Daniela Silcock, Head of Policy - PowerPoint PPT Presentation

The Future Book: unravelling workplace pensions, second edition Daniela Silcock, Head of Policy Research Pensions Policy Institute 29 September 2016 www.pensionspolicyinstitute.org.uk

We’d like to thank... Columbia Threadneedle Investments for commissioning this report

The Future Book: unravelling workplace pensions • What is The Future Book? • Automatic enrolment update • DC saving levels • How are people behaving in the new landscape? • Questions for the future

What is The Future Book? The Future Book is: • A response to shifts in pensions world • A compendium of DC statistics • A projection of future trends • A longitudinal study • A reference document • A source for debate, discussion, analysis and planning

The Future Book: unravelling workplace pensions • What is The Future Book? • Automatic enrolment update • DC saving levels • How are people behaving in the new landscape? • Questions for the future

Smaller employers are beginning to stage • The number of employees going through the automatic enrolment process is reducing • The number of employers going through the process is increasing • Employees in smaller organisations are more likely to opt out

900,000 people have been automatically enrolled since March 2015 Employees automatically enrolled by March 2015 and March 2016 , cumulative Employees 7,000,000 6,000,000 2,192,400 5,000,000 DC contract 1,832,200 4,000,000 3,000,000 3,373,900 DC trust 2,000,000 2,779,800 1,000,000 Hybrid 245,800 292,500 0 310,000 282,000 DB 2015 2016

(cumulative) Employers who completed automatic enrolment declarations of compliance by 31 July 2016 exponentially automatic enrolment process is increasing The number of employers going through the 100000 150000 200000 250000 employers Number of 50000 0 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 2,256 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 27,818 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 54,224 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 206,137 Mar-16 Apr-16 May-16 Jun-16 Jul-16

Those working for the smallest employers have the highest opt out rate at 17% Opt outs by employer size and scheme type (2015) 18% 17% 16% Employer size Scheme type 14% 12% 12% 11% 11% 11% 10% 9% 9% 8% 8% 8% 8% 8% 7% 6% 4% 2% 0%

Workers from larger employers are more likely to leave their pension scheme than workers from smaller employers Proportion of members leaving pension scheme by employer size, 2015 12% 10% 10% 8% 7% 6% 6% 6% 5% 4% 4% 4% 2% 0% 1-19 20-49 50-99 100-249 250-499 500-999 1,000+ Employer size by number of workers

Master-trust enrolments are continuing to rise • Master-trust enrolments are almost at 50% of automatic enrolments • By 2030 half of all DC members could be in master-trust schemes

Nearly 50% of people are being auto- enrolled are in master trust schemes Automatic enrolment by proportion of people to March 2015 and March 2016, by scheme type 2016 2015 Other Master Master Other Schemes trusts trusts Schemes 53% 47% 49% 51% Other Schemes Master trusts Source: The Pensions Regulator

By 2030 50% of DC scheme members could be in master trust/multi-employer schemes Workplace DC by scheme members in 2016 and 2030 Members in 2030 100,000s 160 2016 140 Existing DC schemes 2.1 million 120 Existing DC Other automatic schemes 100 enrolment DC 3.8 million schemes 5.4 million 80 Other automatic enrolment DC 60 schemes 3.7 million 40 Master trust schemes Master trust 20 7.2 million schemes 4.8 million 0 2016 2030

The Future Book: unravelling workplace pensions • What is The Future Book? • Automatic enrolment update • DC saving levels • How are people behaving in the new landscape? • Questions for the future

More people are saving, bringing the average levels down • More people are saving in DC pensions • The average contribution and pot size has fallen • Over time, these will rise again

Median employee contribution rates in DC schemes are decreasing Median employee contribution rates to DC pensions by year 4.5% 4.0% 4.0% 3.5% 3.0% 3.2% 2.5% 2.4% 2.0% 1.5% 1.0% 1.0% 0.5% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Trust-based DC Group personal pensions

Median employer contribution rates in DC schemes are decreasing Median employer contributions to DC pensions by year 9% 8.0% 8% 7% 6% 5% 5.3% 4% 4.0% 3% 3.0% 2% 1% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 DC trust Group personal pensions

Median pension savings have decreased since 2010/2012 Median DC savings by group in 2010/2012, 2012/2014 and 2016 Great Britain, people aged 16 and over (includes both deferred and active savers) £16,000 £15,000 £15,000 £14,000 £12,000 £8,000 £4,000 £0 2010/2012 2012/2014 2016

Median DC pension pots at State Pension age could grow from around £26,000 today to around £49,000 over 20 years Distribution of pension pot sizes at State Pension age for different cohorts (2016 earnings terms) £230,000 90 th £216,363 percentile £192,136 £185,830 £180,000 £130,000 75 th £90,689 £86,874 £80,935 £80,000 median £49,241 £39,450 £25,749 £30,000 £21,524 £8,251 £17,567 25 th £7,449 £3,554 10 th £8,208 (£20,000) Aged 55-64 in 2016 Aged 45-54 in 2016 Aged 35-44 in 2016

The Future Book: unravelling workplace pensions • What is The Future Book? • Automatic enrolment update • DC saving levels • How are people behaving in the new landscape? • Questions for the future

Lump sums are more popular than drawdown or annuities • 87,000 people took lump sums in Q1 2016, compared to 23,000 drawdown and 18,000 annuity contracts • However, the value of funds being invested in drawdown is higher than for annuities or lump sums

People are spending more money on drawdown products than on annuities or through lump sum withdrawals Value of retirement income products and cash lump sum withdrawals by quarter (billions), ABI members £bn £2.0 Annuities Drawdown Cash lump sums £1.55 £1.6 £1.48 £1.40 £1.35 £1.30 £1.27 £1.2 £1.07 £1.17 £0.99 £0.95 £0.99 £0.85 £0.8 £0.86 £0.75 Annuities: * average fund - £52,500 Drawdown: £0.4 * average fund - £67,500, * average withdrawal - £3,800 Cash lump sum: * average withdrawal - £14,500 £0.0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

More people are withdrawing money through cash lump sum than through drawdown or annuity products Numbers of drawdown and annuity purchases and cash lump sum withdrawals by quarter, ABI members 140,000 Annuities Drawdown Cash lump sums 120,688 120,000 100,000 87,000 80,000 60,000 46,012 40,000 46,300 25,105 19,733 20,610 23,210 18,243 20,000 22,385 17,965 20,235 18,779 11,475 0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Are people are engaging in riskier behaviour when they access DC savings? • Fewer people used advice when purchasing annuities or drawdown • More people are accessing lump sums • DB to DC transfer requests have tripled from new IFA customers and doubled from existing customers.

Between 2014 and 2015 the use of independent advice fell from 81% to 69% for drawdown sales and 22% to 20% for annuities New annuity and drawdown contracts sold by ABI members 90,000 200,000 180,000 80,000 Not advised 160,000 70,000 9% 70% 74% 140,000 Restricted advice 60,000 10% 120,000 50,000 Independent advice 100,000 40,000 80,000 30,000 60,000 6% 20,000 7% 15% 40,000 16% 10,000 81% 20,000 22% 20% 69% 0 0 Annuity contracts Drawdown contracts Annuity contracts Drawdown contracts

The Future Book: unravelling workplace pensions • What is The Future Book? • Automatic enrolment update • DC saving levels • How are people behaving in the new landscape? • Questions for the future

Questions for the future • Are higher opt-outs among smaller employers a significant issue? • Will the master trust regulatory framework be sufficient to protect the savings of half of our future DC members? • Are people engaging in riskier behavior when they access DC savings?