A major survey of pension trends conducted by the Association of Consulting Actuaries (ACA) has found pension savings into workplace defined contribution schemes have largely flatlined over the last decade, with average rates of contribution set to fall over the next few years because of low initial auto-enrolment contributions. However, close to six out of ten employers support the idea of ‘auto escalation schemes’, where pension scheme members are encouraged to increase their rate of contributions at a future date often in line with increases in earnings.
The 2013 ACA Pension trends survey, following a questionnaire broadcast in the summer of this year, received responses from 308 employers with over 430 pension schemes covering every size of business.
As well as examining trends in pension contributions, the survey looks at firms’ experiences and expectations from auto-enrolment and views on the Government’s latest workplace pension proposals.
Key survey findings in today’s report are:
- Employers responding to the survey report average rates of contributions into defined contribution pension schemes have changed very little over the last decade – contribution rates are generally failing to keep pace with the pension costs of longer life-spans and an economic climate with low investment returns.
- Employer contributions into defined contribution pension schemes across our sample are averaging between 4½% and 7% of earnings as a whole, with relatively small variances below (generally smaller employers) and above this figure (generally larger employers). Employee contributions hover between 4% and 4½% of earnings, again with employees of larger firms typically contributing above this figure and those of small employers below.
- Close to six out of ten employers (57%) support the idea of ‘automatic escalation schemes’ where pension scheme members are encouraged to increase their pension contributions at a future date often in line with increases in earnings.
- The processes involved in preparing for auto-enrolment is ranked as the most problematic area of auto-enrolment, followed by regulatory complexity (ranked top problem by smaller employers), with communications ranked fourth (but second by large firms).
- Eight out of ten smaller employers have not yet budgeted for the likely increase in costs arising from auto-enrolment.
- When budgeting for the cost of auto-enrolment, the median band of large firms (with 5000 or more employees) expected employee opt-out rates to be between 6% to 10%, however the median band of small employers (with 49 or fewer employees) are budgeting on the basis of employee opt-out rates of between 26% to 30%.
Commenting on the survey results ACA Chairman, Andrew Vaughan said:
“With most employers seemingly auto-enrolling at the minimum level of contributions (2% of qualifying earnings), we can expect average contributions to decline over the next few years before climbing in 2018, when the minimum of 8% of qualifying earnings will be required in all firms. Auto-enrolment on its own isn’t enough. That is why we support the ‘Defined Ambition’ agenda and the survey is also encouraging in showing employers’ support for auto-escalation schemes. In our survey report, we explore the virtues of a ‘Save More Tomorrow’ initiative, which has worked in the USA and is worthy of consideration as a means of encouraging higher pension contributions over the years ahead as the economy grows – increased contributions that are essential as lifetimes in retirement extend. And with the State Pension Age moving towards 70 for today’s younger employees, the added value of higher private pension savings is becoming clear. It is certainly time to save more for tomorrow.”
Other survey findings
- A majority of employers (61%) expect their payroll costs to rise by up to 2% as a result of auto-enrolment, but close to half of smaller employers (46%) expect payroll costs to rise by more than this.
- As a result of auto-enrolment, whilst just over a half of employers expect to enrol all eligible jobholders into either an existing or new defined contribution scheme sponsored by the firm, a fifth expect to enrol employees into NEST or a new multi-employer scheme. However, half of small employers (up to 49 employees) have not yet made a decision on their auto-enrolment scheme provider.
- A fifth of employers expect to restrict previous non joiners and new entrants to a lower-cost scheme sponsored by the firm or a multi-employer scheme or NEST.
- Whereas, at present, around eight out of ten employers say their employees typically retire at age 65 or younger, by 2020 two-thirds expect the typical retirement age to be 66 or later. Not far short of a half then expect typical retirement ages to move out to between age 68 and age 75 by 2028.
The survey report notes that over the next 18 months, around a further 35,000 employers with 50 or more employees will be required to auto-enrol eligible jobholders, with many other employers covered by later staging dates working through exactly how they will comply. This is a ten-fold increase in employers subject to auto-enrolment duties compared to the first year. However, from June 2015, a further 1 million small (5 to 49 employees) and micro employers (4 or fewer employees) must auto-enrol eligible employees in just over a two-year period. This represents about a 170-fold increase in the number of employers subject to auto-enrolment duties compared to the last 12 months. The report questions whether it would not be wise to have a pause in staging ahead of micro employers being subject to auto-enrolment duties whilst providers, advisers and the Pensions Regulator take a breather.
The first report of the ACA 2013 Pension trends survey found support for some of the principal ideas outlined in the Government’s consultation paper on ‘Defined Ambition’ workplace pensions published in November 2013. Larger employers expressed support for legislation that would allow ‘core’ defined benefit schemes, the ability for employers to adjust pension ages in a timely way and for leavers’ benefits to be automatically converted into a defined contribution scheme. Smaller employers said scheme membership and pension contributions would be significantly higher if defined contribution schemes secured a guaranteed pension income building up year by year (see Appendix for a summary of the First Report’s findings).
To find out more from the report, find it here
|
