The new Labour government has a significant opportunity to enhance the financial wellbeing of working people across the UK – one which could reap positive benefits for generations to come. The pensions review and pension schemes bill give the chance to set individuals both on the path towards a secure retirement, and to ensure they can manage their current financial needs.
The starting point for any discussion around the future of pensions must recognise the truly remarkable success of auto enrolment. Today, over 80 per cent of UK workers contribute to a pension, and 12 million people have become pension savers. But despite this increase in coverage, the reality is that most people will not have enough money to adequately fund their retirement.
Assets that generate higher returns are a key part of the equation, and at BlackRock, we are advocates for greater defined contribution (DC) investment in private market assets that provide greater returns. To date, we have launched two long-term assets funds that give savers access to formerly out-of-reach asset classes.
However, this alone is not sufficient. You cannot invest your way out of a lifetime of under-saving.
While increasing pension contributions may seem the obvious solution, the financial struggles many people face today must be acknowledged. Cost of living pressures, minimal savings, and low financial resilience are widespread challenges.
A quarter of UK adults have less than £100 in savings. That means an unexpected expense – such as a washing machine or boiler failure – can push them into a precarious financial situation. As our CEO Larry Fink wrote in a letter to shareholders earlier this year, “who is going to invest money for a retirement 30 years away if they don’t have cash for today?”
Recognising this, BlackRock launched our Emergency Savings Initiative in 2019, as our flagship social impact programme, to help working people build financial safety nets. Since then, the BlackRock Foundation has proudly supported Nest Insight’s work on payroll savings aimed at employees on low and moderate incomes. Trials of both opt-in and opt-out payroll savings models have shown the opt-out approach to be most effective – significantly boosting savings participation in the three workplace trials we have sponsored.
In each of these trials, employees automatically start saving a default amount each pay period into an instant-access savings pot (unless they choose to opt out). The findings show that the number of people saving increases by around 50 percentage points when compared to an opt-in approach. Employees save persistently and use their accounts actively, accessing their savings when they need them, and then replenishing their savings pots again.
The trials also show that workplace autosaving encourages saving through workplace pension schemes. When people have savings to cover today’s expenses, they are more likely to save for tomorrow. This insight has meaningful implications for the future of auto enrolment. By integrating emergency savings into auto enrolment, we can create a framework that supports both long and short-term saving.
Incorporating emergency savings as part of auto enrolment could enable pension contributions to rise, while mitigating some of the risks of doing so to those in highly precarious financial positions. What if people only saved more for retirement once they had already built an emergency buffer? This approach could help achieve a 12 per cent contribution rate, while addressing critically low levels of financial resilience among many working people.
The US has already legislated to allow pension-linked emergency savings. The new Labour government has an opportunity to follow suit and improve the financial lives of working people across the UK.
But implementing this vision will require joined-up thinking.
Labour has committed to both a pensions review and a national financial inclusion strategy. These initiatives need to be considered together. Having the new minister for pensions sit between the Department for Work and Pensions and the Treasury is a welcome step. Labour should continue to adopt this cross-departmental approach, by considering financial wellbeing at every stage of life.
In doing so, Labour can set a new standard for financial wellbeing in the UK. This would ensure people are not only better prepared for tomorrow, but can handle the financial pressures they face today, too.
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