This month sees the completion of the staging timetable by which all employers had to automatically enrol their staff in a workplace pension. It’s therefore a good point to review the impact of Auto Enrolment (AE) to date while also looking forward to potential future developments.
Nobody could possibly deny that the introduction of AE 5 years ago has been a major step forward in improving the participation in and extent of saving in workplace pensions. The initiative has increased those regularly saving for their retirement by close to 10 million, opt out rates are low at c 10% and there are encouraging noises about the introduction of Australian-style retirement income targets to incentivise further saving.
There are, however, some sizeable clouds beginning to appear on the horizon. Let us put to one side the thorny question of whether current savings levels are sufficient. Let us also park the weight of evidence (here and abroad) suggesting that statutory auto-enrolment minimum contribution levels are viewed as shorthand for that necessary to buy a comfortable retirement. Instead, let’s focus on the seismic shifts about to hit the AE market in the next 15 months.
From 6th April this year, statutory minimum total contribution levels increase from their current level of 2% of qualifying earnings to 5% and then, twelve months later, to 8%. At the same times, the minimum contribution to be met by the employer increases from 1% to 2% and then to 3%.
Most employers, particularly at the small to medium end, are making AE contributions in line with the statutory minima; significant increases in the cost of scheme funding are about to be experienced. Similarly, the DWP Automatic Enrolment Review 2017 suggests that most enrolled employees are currently saving at the minimum contribution levels; take home pay for large numbers of low-average income workers is about to decrease by c £25/month with a total £50/month reduction by April 2019.
Will these increases see a ramp up in opt out rates among employees? If so, what is the current industry response to ensuring that contributions are maintained and the overall raison d’etre of AE is protected? While the financial belt-tightening being experienced among lower earners is well-publicised, this significant additional expense (as it will surely be viewed by many) does not yet appear to be consuming many column inches.
Instead, the financial press and the advice community continues to consume itself with erecting “hands off” signs in front of the possibility of future threats to lifetime allowances and tax relief on private contributions. While such conjecture does a good job in building the case for financial advice, why isn’t it as obvious that similar importance is placed on the protection and enhancement of the UKs best piece of pensions legislation for a generation?
From a relatively small sample size, it becomes apparent that there is low awareness of the upcoming landscape changes, both among employers and their workforce and that the changes have limited visibility within scheme communications. Indeed, as there is no legal requirement to communicate to staff on this issue, the industry could be using this opportunity to seize the initiative and build greater awareness, appreciation and trust to everyone’s, including their own, longer term benefit.