The survey also suggests the success to date of auto-enrolling over 5 million into workplace pensions may be challenged by rising opt-out rates amongst smaller employers who have yet to auto-enrol their employees into pensions. The survey report says the Government needs to have a ‘next steps’ strategy to head-off the danger of rising employee opt-outs including a review of spending plans, tax and NI rates and incentives so employers and employees have the wherewithal to meet the cost of much needed higher minimum pension contributions in the years ahead.
The ACA survey, conducted over the summer, gathered responses from 477 employers sponsoring over 620 pension schemes covering every size of business. Of these, 46% had reached their staging date for auto-enrolling employees into a qualifying scheme. Over half of the smaller employers who responded to the survey who had not reached their staging date presently offer no pension arrangement for their workforce.
Key survey findings
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For smaller employers, the forecast employee opt-out rate by smaller employers from workplace pensions is down on the figure reported two years ago, but the median band is in the range between 16% and 20% of eligible employees. This is much higher than large and mid-sized employers who have auto-enrolled their eligible employees, where median opt-out rates are reported in the 8-9% band (see Appendix - Figures 1 and 2).
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Over the years the ACA has been monitoring trends[1] there has been a gradual, if small, increase in median employer and employee contribution levels into defined contribution arrangements. It is clear from this year’s research that this trend has reversed due to the present low minimum contribution rates required for auto-enrolment from employers and employees (see Appendix – Figure 3).
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Whilst the majority of survey respondents wanted both the minimum auto-enrolment employer and employee contributions to stay at the 2018 levels (respectively 3% and 4% of qualifying earnings), over four out of ten were prepared to see minimum contributions rise in 2020 to 4% from employers and 5% from employees, or higher.
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Whilst our 2013 survey found a higher level of interest in auto-escalation[2], this year’s survey still found slightly over a quarter of employers prepared to support the idea whereby employees are encouraged to auto-escalate pension contributions at a future date when wages/salaries increase.
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Over a quarter of employers responding to the survey still sponsor a defined benefit scheme, but only 7% of these are open to new and existing employees, with the balance either closed to new members (56%) or entirely closed to future accrual (37%).
The survey underscores that whilst auto-enrolment is introducing many more employees to pension saving, supported by their employer contribution and tax relief, big hurdles lie ahead in terms of auto-enrolling employees in 1.8 million smaller firms at much the same time as minimum contributions climb quite sharply. And now, of course, many employers will be expected to boost their employees’ earnings via phased increases in the minimum living wage, set to reach £9 an hour in 2020.
The survey notes that the oft-quoted ‘success’ of auto-enrolment has yet to be proven with so many new pension savers as identified by this and other reports making minimal pension savings, especially as ‘affordability’ has been reported as the principal reason why individuals to date have opted-out[3]. What occurs in 2017 and 2018 when minimum contributions rise quite steeply will determine the true scale of the policy’s success in extending pension coverage.
However, even if the high rates of participation are maintained, the eventual 2018 minimum 8% contribution, when phasing is completed, is unlikely to generate for very many the retirement income that will lead onto a comfortable retirement. Assuming 40 years of contributions at 8%, with 3% real return on investment, a person on average earnings is likely to fall markedly short of the Pension Commission’s targeted replacement income of two-thirds of pre-retirement income. Indeed, a contribution rate of between 14-16% would probably be needed to reach this benchmark. Variable earnings over a lifetime and shorter periods of savings make the argument for higher than 8% contributions all the more powerful, especially given the forward pressures in funding State pensions due to a rapidly ageing society.
ACA recommends further phased increases in minimum pension contributions
Reflecting the survey results, the ACA report recommends:
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Serve notice that in 2018 the Government will reduce the lower band on earnings eligible for auto-enrolment and lower the auto-enrolment earnings threshold to extend provision to more women and low earners.
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Serve notice that the Government will increase the minimum auto-enrolment contributions by 1% every two years after 2020 until they have reached a combined contribution of 16%. The Government’s contributions will take account of the outcome of the recent tax relief consultation.
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Serve notice that the Government will assist employers and employees over the period of these increases in pension contributions by way of planned reductions in NI and further increases in tax free allowances and the Employment Allowance.
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Serve notice that these increases in contributions and tax adjustments may be implemented subject to the performance of the economy, particularly in terms of earnings growth and growth in earnings net of tax.
Commenting on the survey, David Fairs, Chairman of the ACA said:
“Whilst the vast majority of smaller employers have still to auto-enrol their employees into pension schemes, it seems clear that the ‘first step’ of recruiting more employees to join schemes has been a considerable success to date.
“In assessing the challenges ahead, we believe the Government now needs to have a ‘next step’ strategy ready to address the potential danger of rising opt-outs as employers – particularly small and micro-employers – and their employees react to the increase in minimum contributions in 2017 and 2018. It is important to keep those auto-enrolled in schemes as contributions rise and then continue to encourage higher savings in the future.
“For the majority of employers this is shortly after their staging date for auto-enrolment and lands in the middle of sizeable projected increases in the ‘living wage’.
“Whilst much of the recent debate about pensions has dwelt on legitimate desires to drive down charges and to free-up pension monies by way of the popular ‘freedom and choice’ reforms, our survey points to the greater need – part of what we see as the ‘next step’ strategy – that looks to a gradual, but essential increase in pension contributions. This is needed to ensure that many more retirees save sufficient amounts for both a comfortable retirement income and one where they have real choices to spend some of their accumulated savings as they approach or reach retirement.”
The first report of the ACA 2015 Pension trends survey ‘Time to get real’ is available below
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