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In from the cold: How NEST is helping to broaden access to pension saving

13 August 2018 | Markets and Economy

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Steve Utkus

Although participation in workplace pensions had been a feature of post-war industrialised Britain, the participation rate was on a downward trend by the mid-1990s, with lower earners in particular falling out of provision. The rising cost of offering final-salary schemes increasingly shifted the focus towards the top end of the salary scale.

This falling participation rate, combined with the well-known demographic problem of funding more state pensions from relatively fewer tax-paying workers, spurred several actions by the government.

In particular, legislation was written to introduce mandatory auto enrolment and create NEST, the National Employment Savings Trust. Auto enrolment forced all employers to enrol their workers into a qualifying pension scheme. Meanwhile, NEST was given a statutory obligation to accept any employer that wished to use it to meet the auto enrolment requirement.

Ever since the government announced these two ideas, there has been significant debate about the extent to which they could help close the gap in pension provision among lower earners. Now, six years after NEST's launch, we can begin to answer some of those questions.

We have just completed an in-depth study in partnership with NEST, jointly analysing more than 11 billion data points covering NEST's 6.5 million members across 616,000 different employers. You can read the full paper, entitled How the UK Saves 2018. We believe it to be the biggest study of retirement savings behaviour ever undertaken in the UK.1

The paper offers up some fascinating conclusions. Here are seven highlights:

  1. Broad employer coverage – Companies using NEST for their pension provision are spread across the whole of the UK and the full range of sizes and industries.
  2. Auto enrolment dominates – Unsurprisingly, automatically enrolled employees make up the vast majority of NEST members, at 92%. However, 250,000 workers have actively opted in. Many of these people are on very low incomes and are unlikely to have been saving in a pension before.
  3. Low opt-out rate – The proportion of workers opting out of their company pension, 6%, is lower than most commentators predicted.
  4. Low reliance on State Pension – Few of the workers who had opted out said that they planned to rely on the State Pension in retirement, illustrating growing awareness of the need for private pension savings.
  5. Modest pot sizes – A criticism of NEST was that the contributions would not be sufficient to make a significant difference to members’ lives in retirement. While we did indeed find pot sizes to be modest, this is partly a function of the deliberately low initial contribution rates. These rates are set to quadruple over the next two years, resulting in much higher long-term balances.
  6. Healthy replacement ratio – We forecast that saving through NEST could provide a 22-year-old, low-income worker with a pension of £3,000 a year in today's money. Combined with the State Pension, that sum represents a healthy income replacement ratio of 55%.
  7. Women are better at saving for retirement than men – Although pot balances are higher for men than women, once we strip out salary differences, women seem to save more for retirement pound-for-pound.

This research has shown us that NEST is already having a profound effect on the UK pension landscape. The participation rate has risen from 55% to 75% since NEST's inception six years ago, as millions of people who had previously not had any means of saving for their retirement have re-engaged with their financial futures.

In researching the paper, we have identified many questions that we want to address in future editions. No doubt, on reading it, you will have questions of your own. We'd love to hear them so that we can continue a conversation about retirement saving in the UK. And the bigger that conversation gets, the more we can all do to improve pension provision further in the years to come.

1 The paper forms part of a series that we began in 2000 in the US and expanded to cover Australia in 2017.

Important information:

This document is directed at professional investors and should not be distributed to, or relied upon by retail investors.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Issued by Vanguard Asset Management, Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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