Kate Smith, Head of Pensions at Aegon comments: “The Automatic Enrolment evaluation report published today by the Department for Work and Pensions shows that overall auto-enrolment has been a success with millions more now enrolled into a workplace pension. Looking at the numbers, it’s positive to see that the number of eligible employees who are now saving into a workplace pension has increased dramatically as has the annual amount being saved. This is set to continue as the minimum contributions rise for the second time next April.
“Across the private sector in particular, contribution rates are up and it’s encouraging to see the level of contributions being made by some employers, with 24% paying in more than 3%. Equally positive is the relatively low number of employers who are levelling down with the report highlighting that where employers have experienced increased contribution costs as a result of auto-enrolment, only 1% of employers have adopted levelling down as a strategy to absorb increased contribution costs, far less than expected.
“While opt-out rates remain consistent overall, there’s evidence that behavioural economics is working. Employees are getting used to the idea that each job comes with a pension, and that normally this means paying pension contributions. This is clearly demonstrated by lower opt-out rates for new recruits compared to when employers ‘staged’. Surprisingly, higher earners tend to have a higher opt-out rate than lower earners, this is a worrying trend, unless they have other assets and savings, as they are the ones who won’t be able to fall back on the State.
“The not so good news is that participation rates are down from a peak at 79% in 2015 to 73% in 2017, although this may be due to the way the data has been collected. We’re beginning to see trends emerging, including across gender and age brackets with women overall having higher participation rates than men. While pension participation remains highest for older employees, it’s good to see that the largest increase has been amongst the youngest in the workforce, those aged 22 to 29.
“The report shows that businesses have responded well to auto-enrolment and while the figures speak for themselves in revealing the scale of success, it’s reassuring that around two-thirds of employers found their ongoing duties in relation to auto-enrolment less onerous and burdensome than expected.
“The 2018 increase in auto-enrolment contribution had little impact on the opt-out rate, partly because many employees were already paying above the minimum. The situation may be very different when contributions go up again in April 2019, with 6.1 million employees needing to increase their contributions to 5% of a band of earnings. Even with the incentive of the employer 3% contribution and tax relief on their own contribution, this could be a massive challenge.
“Despite this the harsh reality is that for most people auto-enrolment contributions aren’t going to be enough, and generally, people should be saving double this amount.”
Steve Webb, Director of Policy at Royal London said: ‘The lack of pension saving by the self-employed has reached epidemic proportions, with only a tiny fraction of self-employed people actively saving in a pension. But despite a 2017 manifesto commitment to include the self-employed in automatic enrolment, we now know that all we will have by 2019 is more research and pilots, mainly focused on testing different forms of marketing message. The lesson of automatic enrolment is that by far the most effective method to nudge the self-employed into pension saving would be via an opt-out system administered through the tax return process which could reach up to two million self-employed people a year. But HMRC clearly doesn’t have capacity to take on this agenda. The lack of progress on this issue is profoundly disappointing, especially with millions of people spending periods of their working life in self-employment’.
Paul Waters, Partner at Hymans Robertson: “It is great to see auto enrolment continuing to successfully ensure employers help more people save for their retirement. It’s no surprise to see that opt outs remain very low even as contribution rates went up earlier this year, which is clearly due to inertia.
“Despite this there is no time to relax and think that this is ‘job done’. Many employees will think that their pension contributions will provide them with a comfortable income in retirement, since the AE pension rate is being set automatically by a combination of the government and their employer. In reality, they will be dismayed to find that they simply haven’t saved enough when they come to retirement.
“While the number of people saving into DC pensions is increasing, even with the further increase to at least 8% contributions in 2019, people will be massively under-saving. Further measures such as pushing out the target retirement date to coincide with their State Pension Age and further increasing contributions to a total of 12%, will be needed to achieve an adequate income in retirement. At 12% we would begin to see a contribution that will have a meaningful impact for employees’ retirement savings. Using that as a base and building from there, we can see far greater certainty of them reaching a target income that they can live on in retirement.
“The PLSA’s ‘Hitting the Target’ campaign to increase contributions to 12%, and provide people with clear, simple targets for their savings, will be an important step in overcoming this. We know from using a simple target in Guided Outcomes® the difference it makes, by providing people with the context they need to understand how much to save.
There simply has to be more understanding on the decisions people are making about their long term savings. This mission to address the challenge and encourage people to increase their savings is vital if employees are to reach savings levels that will provide them with adequate retirement incomes.
“With the introduction and success of auto enrolment, great progress has been made in the race to get the working population saving enough. We’ve encouraged people across the starting line and there is still a lot of energy to keep this going, but this is a marathon. Right now we’ve got people signed up and underway. There is a long way to go to ensure employees reach the end of the race with adequate savings to live on in their retirement. Collectively we have the tools to do this, we just need to use them.”
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