Benefits October 25, 2022

U.K. Nest Pension Auto Enrollment Remains ‘Robust’

Despite turbulent year, auto-enrollment continues to thrive, with opt outs lower than expected.

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In the decade since its introduction, the U.K.’s pension auto-enrollment system continues to thrive, and fewer workers are opting out than had been expected, according to a report from Nest, the British government’s defined contribution workplace pension. As of the end of March, approximately 17.25 million total enrollments have been made into Nest, a 17% increase from last year.

“There has continued to be impressive growth in the number of member enrollments,” Nest Chief Executive Officer Helen Dean wrote in the foreword to the report. “With the increases to mandatory minimum contributions that took place in 2019 and uncertain labor market conditions since 2020, the auto-enrollment system and the Nest scheme are proving to be robust.”

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According to the report, the rate at which workers have opted out of workplace pensions is much lower than expectations prior to auto enrollment taking effect, with an overall opt-out rate of 8.3% as of the end of March. It also said that opt-out rates decreased by around two percentage points in 2021-2022 compared with 2020-2021.

“The great majority of Nest members have continued to follow the default settings that they’ve been enrolled into,” Matthew Blakstad, director of analysis at Nest Insight, said in a statement. “And, as a result, overall levels of retirement savings have continued to rise throughout these challenging times.”  

Under legislation passed by the U.K. government 10 years ago, employees of a company must be automatically enrolled into a workplace pension plan if they are between 22 years old and the state pension age, and earn an annual salary equivalent to at least £10,000 from their employer. Employers are required to make contributions each pay period into a qualifying workplace pension plan. The program started with larger companies, and then with employers of all sizes participating, as of February 2018.

The level of minimum mandatory contributions was increased in phases. It began with 2% of qualifying earnings, with at least 1% contributed by the employer, and eventually rose to 8% with at least 3% contributed by the employer as of April 2019. Participants are allowed to opt out of auto enrollment after just one month, and can also stop contributions at any time. However, they can’t usually access the money in their pension until they are at least 55 years old.

Other findings from the report include:

  • Contribution levels paid by employers and members remained largely stable, despite the ending of government interventions.
  • Approximately 1 million businesses are now registered with Nest, a 10% increase from last year.
  • Individual pension balances grew 11%, while contributions increased 10% from 2020-2021.
  • The number of participants who made their own additional contributions to their retirement funds rose 36% from the previous 12 months.
  • The total level of additional member contributions made to the plan rose by over 50% compared with the previous year.
Data and Research October 25, 2022

GAO Study Highlights Increased Mortality of Impoverished Seniors

The U.S. is more unequal than the other countries studied, low income and wealth are associated with higher mortality, and Social Security does a great deal to reduce the impact of inequality, the study found.

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A recently published report from the Government Accountability Office assessed and compared the relationship between income, wealth, and life expectancy of the elderly in the United States, Germany, the United Kingdom, and Canada.

The study chose Germany, Canada, and the U.K. as comparators primarily due to the quality and availability of their data on the subjects being examined. The researchers focused on those aged 55 or older from 1998 to 2019.

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The research concluded that wealth and income inequality is greater in the U.S. than the other three countries and that lower income and wealth are associated with lower life expectancy. For example, in 2016, those in the top quintile on average made 13 times more than those in the bottom quintile in the United States. In Canada, this same ratio was 8 to 1.

Each declining income quintile in the U.S. was associated with an increase in mortality. The study tracked populations in their 50s, 60s, 70s, 80s, and 90s in 2002, and measured what percent of each group survived until 2012 by income quintile. For those in their 50s, 60s, or 70s, mortality increased as income decreased, but this pattern did not extend to the 80s and 90s, suggesting that lower income is more predictive of an early death. For example, 68% of those in their 70s in the top quintile in 2002 survived until 2012, whereas only 61% in the middle quintile, and 48% in the bottom quintile.

It also highlighted the impact that Social Security benefits have in diminishing the impact of wealth inequality. When one does not account for the present value of anticipated Social Security benefits, the top wealth quintile on average has a net worth that is 272 times higher than the bottom. However, when accounting for Social Security, this ratio drops to 27 to 1. The wealth ratio from the top quintile to the middle quintile drops from 37 to 1 down to 8 to 1 when Social Security is accounted for. This sharp reduction in inequality is due to the progressive method by which Social Security benefits are calculated.

Their definition of wealth included the value of defined contribution plans and higher wealth households keep a higher proportion of their wealth in financial assets than households in lower wealth quintiles. Though the authors do not state it, this suggests that access to retirement investments might have a disproportionate impact on this gap.

However, female heads of households do not benefit from Social Security as much on average as couples or male-led households. This is because women have a lower workforce participation rate than men, have lower incomes in general, and are more likely to stop working when they start a family. As a result, they tend to receive less in Social Security payments when they retire than men do. This problem is compounded by the fact that women tend to live longer than men.

They also noted that defined benefit plans also tend to reduce the wealth gap between the top and bottom quintiles if their present value is accounted for, but defined benefit plans are becoming less common.

The value of pensions provided by a national government in reducing wealth inequality holds true in the other countries included in the study also. In Germany, the wealth ratio from the top quintile to the middle quintile drops from 13 to 1 down to 4 to 1 when their public pension scheme is accounted for. The study also praised Germany for having national health insurance that covers long-term care for seniors, a program the country began in 1995, and which diminishes the rate at which seniors lose their wealth as they age.

The study was commissioned by Senate Budget Committee Chairman Bernie Sander, D-Vermont, and builds on a similar study from 2019, likewise sponsored by Senator Sanders, which tracked growing income inequality among seniors over time. That study found that income and wealth inequality were more or less stable from the 1940s to the 1970s but have been increasing sharply from the 1980s to the present day, with a few short-term exceptions, such as the 2008 market crash which damaged the net worth of the top quintile more so than the bottom due to their higher exposure to financial assets.

In response to the recent study, Senator Sanders said in a press release that “poverty is a death sentence among older American households.”

 

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