£2,000 In personal account after five years says IFS

The shift to automatic enrolment and increased requirements on employers to make contributions should both boost pension coverage but many accounts will be tiny, according to the Institute of Fiscal Studies.

A report published by IFS researchers has revealed new information on the government’s target market for personal accounts.

In 2005 there were around 4.7 million employees who were not offered the chance to join an employer’s pension scheme. These individuals are particularly likely to be enrolled by their employer into a personal account rather than into another compliant pension scheme.

Over the five-year horizon from 2001 to 2005 there were 8.6 million individuals who were in this situation in at least one year. This suggests that the number of personal accounts could grow rapidly over time as individuals’ circumstances change.

Of these 8.6 million employees nearly half saved in a private pension at least once over this five-year period.

This suggests that some contributions brought into personal accounts or other workplace pensions as a result of the reform might, without the reform, have been placed into a pension such as a personal pension (either in that year or a different year), says the IFS.

Default pension contributions from the 4.7 million employees not offered the chance to join an employer’s pension in 2005 would have totalled £4.2 billion.

But many individuals would accumulate relatively small amounts. Over the five years from 2001 to 2005 half of these 4.7 million employees would, by default, have made total contributions of less than £2,170.

Matthew Wakefield, senior research economist at the IFS, says: “In 2005 half of employees not contributing to a private pension earned less than £14,000, and more than half had no net savings.

“Getting such individuals into pension saving might be seen as a success of the policy, but any increase in pension saving is, at least in absolute terms, likely to be small.

“While many of these individuals have little scope to finance new pension saving by reshuffling existing assets, some could pay down existing debts less quickly, which would still mean that new pension saving was not new saving overall.”