“Looking at the raw statistics, it’s difficult to argue that auto-enrolment has been anything other than a huge success. Despite the challenges it posed to the industry and employers the market has evolved to provide a range of pension scheme solutions that are efficient and saver focused.
Employees also appear to agree. The original fear was that nearly a third of people (30%) would opt-out of their employer’s workplace pension scheme. The reality is that opt-out rates are now expected to be half this level, at up to 17%. Royal London’s actual experience is that opt-out rates are even lower than this, currently at around 8%, so half again.
We believe this reflects the value of having access to a quality scheme, set up with the help of a qualified financial adviser to explain the benefits of saving in a pension. In addition, research we recently conducted encouragingly shows that millennials, who were expected to struggle with keeping up pension contributions, are in fact less likely to opt-out than anticipated.”
While we can celebrate the success of auto-enrolment over the last 5 years, there are changes that need to be made to make sure auto-enrolment continues to be successful over the next 5 years and beyond.
Royal London 5 point action plan for the future of auto-enrolment:
1. Serious consideration as to how we get people to save beyond the minimum 8% of pensionable earning so savers end up with a decent pension fund. For Royal London the current average contribution rate is 6.1% – far higher than the mandatory minimum 2% of qualifying earnings.. However, without the benefit of financial advice many employers and employees may only stick to the minimum contribution levels required;
2. Expansion of the criteria so people such as the self-employed and low earners with multiple jobs can also be auto-enrolled or have similar opportunity to improve their future pension savings;
3. Introduction of mandatory regular reviews so workers are not trapped in poor performing schemes. While all auto-enrolment schemes now benefit from an Independent Governance Committee (IGC), there is still no requirement for employers to review their scheme to ensure it still delivers true value to the members.
4. Addressing the arbitrage created by schemes that operate on a ‘net pay arrangement’ so that non-taxpayers, no matter what type of scheme they are in, get the tax relief they are due.
5. Improvement of engagement so pension savers and current non-savers appreciate the value of long term pension savings and planning and can then be ‘nudged’ into saving more.
Jamie continued: “Much of the success of auto-enrolment so far can be put down to statutory duties. Over the next five years, success will be more dependent on the actual actions of individual employees and employers. So appreciating the benefit of using a qualified adviser to regularly review pension schemes will be vital in achieving better outcomes for workers and crucial in helping prevent people sleepwalking into poverty in their retirement.”
The Government is currently reviewing how to build upon the success of automatic-enrolment and how to encourage as many people as possible to save into a workplace pension. Royal London has recommended that plans need to be put in place so pension contribution levels go beyond 8% in total and that people are ‘nudged’ to put money into their pensions when they receive a pay rise.
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