Auto-enrollment and buyouts will be “big drivers” of growth for work and trust-based pensions, according to a new report by the research and consulting firm, GlobalData. The firm also predicts that all businesses will provide a pension plan for their employees by February 2018, and the total minimum contribution will be 8% by April 2019.
“Auto-enrollment has been introduced by the government to increase pension savings through employer-workplace pensions, and this will be a big driver of growth in work- and trust-based pensions,” said Danielle Cripps, financial analyst at GlobalData, in a news release. “By February 2018, all businesses with employees will have to provide a pension to those eligible, and by April 2019 the total minimum contribution paid into a pension will be 8%, meaning that more individuals will be contributing, and at higher amounts. However, there is fear that increasing contributions may cause individuals to opt out.”
In 2016, the UK pensions market’s annual premium equivalent (APE) was worth £10.8 billion ($13.9 billion), according to the Association of British Insurers. GlobalData predicts it will reach £17.5 billion ($22.6 billion) APE by 2021.
However, critics say those who qualify for the state pension system now need 35 years of National Insurance Contributions (NICs) and will lose an average of £19,000 ($25,000). The original system required 30 years, while 10 years of NICs are required to qualify for any pension. Before the shift in plans, Age UK calculated that 70,000 people would lose all state pension qualifications, according to the BBC.
UK state pensions changed in 2016 from a two-tier to a flat-rate model. Additionally, the eligibility age to receive the plans continues to grow as life expectancy increases. In the two-tier model, basic pensions would be topped off with an extra earnings-linked payment. The flat-rate pension is a single-tier option that combines the previous tiers.
Also discussed in the report are “new pension freedoms,” which see more participants opting for cash withdrawals or income drawdowns as opposed to buying annuities.
In order to negotiate the increasing pension choices experts are anticipating a higher demand for financial services. However, independent financial advisors tend to focus more on their wealthier clients, creating an advice gap for the lower and middle class. To resolve the issue, Cripps feels that advances in technology and artificial intelligence are required.
“Technology and robo-advice will provide a solution to this by helping individuals understand how much they have saved across all of their pension pots,” Cripps says, and suggests workers ask advisors what needs to be done in order to ensure a true retirement.