Pension auto-enrolment, so far considered a significant success, is set to take a great leap forward.
It is being strengthened and expanded but how will those affected react? Could it increase rates of opt-out?
Nobody really knows.
Auto-enrolment started in 2012, and more than nine million people now have a workplace pension.
But the Government estimates there are still about 12 million saving too little for their retirement.
The scheme, which automatically enrols those working in a private or public sector firm into a workplace pension, is currently open to those aged 22 or above, who earn more than £10,000 from one job. Employers generally choose to calculate contributions based on how much you earn between £5,876 and £45,000.
Now, it will be extended to 18-year-olds, bringing in 900,000 young people.
Pension contributions will be assessed from the first pound earned, rather than from the existing lower earnings limit.
Currently the auto-enrolment minimum total contribution is two per cent – one per cent each from the employee and employer. From April, the minimum total contribution will increase to five per cent, with the employee paying three per cent. One year later, it will increase again to eight per cent, with the worker paying five per cent.
All this is being pushed through because the Department of Work and Pensions has estimated that around 12 million workers – or 38 per cent of the workforce – are still ‘under-saving’ for their retirement.
And as part of that it wants also to address the self-employed who make up about 15 per cent of the workforce, accounting for 4.8 million people. The Government is to launch a series of ‘interventions’ to explore how technology could help increase their pension savings. These ‘interventions’ are likely to involve organisations that work closely with self-employed people – including banks and labour contracting companies.
As might be expected, workplace pension savings are at a 10-year high. Opt-out rates have been running at around 17 per cent, less than expected.
There are good reasons to stay opted-in – savers benefit from their employer’s contribution and Government tax relief.
But people are being asked to contribute more at a time when they are being squeezed by higher inflation, slowly rising interest rates and stagnating wage increases.
So it seems likely that opt-out rates will jump … but by how much?
According to research by Aviva, released at the turn of the year, some 34 per cent of people haven’t decided yet if they will continue to save into a workplace pension once the changes happen. Overall, only four per cent of respondents said they would leave their scheme after 2019, while 12 per cent will consider that option.
Commenting on the survey, Colin Williams, managing director of workplace benefits at Aviva, sees the positives. “Only a small proportion of people appear to be intent on opting out of their pension when contributions rise.”
However, in her thoughts, Kate Smith, head of pensions at Aegon, cautioned: “There is a risk opt-out rates may spike as people start to notice the impact on their take-home pay. These pressures could act as the first big challenge to the auto-enrolment programme.”
Speaking last month, David Gauke, Secretary of State for Work and Pensions, is untroubled.
He said: “We are committed to enabling more people to save while they are working, so that they can enjoy greater financial security when they retire.
“We know the world of work is changing, so it is only right that pension saving does too. This ambitious package will see more people than ever before helped onto the path towards building a secure retirement.”