Pension Savings: Start at 18, Urges L&G Chief

Calls Grow to Lower Auto-Enrolment Pension Age to 18

A leading voice in the British financial sector is advocating for a significant change to the current pension auto-enrolment system: lowering the age of eligibility to 18. This proposal aims to encourage younger workers to begin saving for retirement earlier, potentially leading to greater financial security in their later years and providing a boost to the UK economy.

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Antonio Simoes, the Chief Executive of Legal & General, one of the UK’s largest money managers, argues that reducing the auto-enrolment age from 22 would have numerous benefits. He believes it would foster a savings culture among young people entering the workforce, whether in their first jobs, apprenticeships, or temporary positions. This early start, he contends, would translate into larger pension pots and reduced reliance on state benefits in the future.

Simoes emphasises the urgency of addressing pension adequacy, highlighting the importance of early contributions, investment returns, and the length of time funds are invested. He believes that initiating pension savings at 18, even with modest contributions, could have a transformative impact over the course of a working life. Currently, auto-enrolment schemes are only available to individuals aged 22 and over, leaving a significant gap in the early earning years.

Drawing parallels with countries like Australia and Canada, where the auto-enrolment age is already set at 18, Simoes suggests that such a change is not only feasible but also beneficial. His call for reform coincides with the launch of a government review of Britain’s retirement provision, led by Pensions Minister Torsten Bell. This review will investigate disparities between retirees with generous company pensions and those primarily reliant on the basic state pension.

Addressing Retirement Savings Inequalities

The government’s review is expected to explore potential solutions to retirement poverty, including the possibility of allowing individuals to access their pension funds earlier in times of financial need. Another key issue on the agenda is the level of auto-enrolment pension contributions. Currently, these contributions total 8% of an employee’s salary, with the employer contributing 3% and the employee contributing 5%. There is growing pressure to increase this total to 12%, but this proposal faces potential hurdles.

The Federation of Small Businesses has already voiced concerns about the impact of increased auto-enrolment contributions on businesses, particularly in light of recent increases in employers’ National Insurance contributions. Extending auto-enrolment to 18-year-olds is also likely to encounter resistance, as it would add to the financial burden on businesses.

However, Simoes maintains that the long-term benefits of such a change would outweigh the costs. He argues that it would create a “win-win” situation, where future retirees are in a stronger financial position, reducing their dependence on the state. Furthermore, he believes that increased savings would lead to greater capital availability for the UK economy, supporting job creation, infrastructure development, and national resilience.

The Broader Economic Impact

Simoes contends that larger pension pots could be channelled into productive investments, stimulating economic growth and regeneration. He also highlights the importance of retiree spending, noting that consumer spending accounts for a significant portion of the UK’s gross domestic product, with retirees contributing a substantial share.

His intervention follows a recent announcement from the Labour party regarding plans to lower the voting age to 16, further fuelling the debate about the appropriate age for individuals to assume responsibility for important decisions, including financial planning for retirement.

Concerns Raised Over High-Risk Pension Strategies

While some advocate for increased pension contributions and early enrolment, concerns have been raised about alternative strategies aimed at growing pension pots faster through higher-risk investments. One such plan, endorsed by several prominent companies, prioritises maximising returns by investing in riskier assets like private equity and infrastructure.

However, critics argue that this approach could leave many retirees worse off due to the impact of high fees associated with these investments. James Daley, head of the Fairer Finance campaign group, cautions that the only certainty in investing is cost and that high fees can erode investment returns over time. He expresses scepticism about the assertion that pension funds with lower costs necessarily deliver worse returns, stating that evidence to support this claim is lacking.

Daley argues that most “active” pension fund managers, who select their own investments, underperform in the long run. He views the employers’ pledge to prioritise higher-risk investments as “truly bizarre” and expresses surprise that so many reputable firms have endorsed it.

The Importance of Employer Contributions

Critics also point out that the focus on investment strategies overlooks a more fundamental issue: the insufficient level of contributions to workplace pension schemes, particularly from employers. While auto-enrolment has brought millions of workers into pension schemes, the minimum contribution levels may not be adequate to provide a comfortable retirement.

Under auto-enrolment, millions of businesses contribute a minimum of 3% of a worker’s salary into their pension, with the employee contributing at least 5%. These contributions are then invested on their behalf, but there is no guarantee of a specific income upon retirement.

The government’s upcoming review of retirement savings is expected to address the issue of contribution levels. While fees for default pension funds are capped at 0.75% per year, this has led some schemes to opt for cheaper, “passive” forms of stock market investing. Some argue that this focus on fees has resulted in reduced investment in UK equities, potentially hindering the growth of UK companies.

The government hopes to encourage pension funds to merge into larger schemes to facilitate investment in private companies while maintaining cost controls.