The minimum auto-enrolment increase to 5 per cent next month will not lead to large-scale opt-outs by members, according to Royal London.
Analysis by the firm has found that a number of factors will combine to keep pension scheme membership at a high level. Around nine million people have been automatically enrolled into a workplace pension since 2012, by approximately one million employers. In April contributions are set to increase to 5 per cent from 2 per cent, made up of employee contributions of 3 per cent and employer contributions of 2 per cent. This will rise to 8 per cent in 2019, with 5 per cent coming from the employee and 3 per cent from the employer.
When the policy was introduced the government expected that 67 per cent of employees would remain in the pension but this has been much higher at 90 per cent. However, there are fears that the increase to contributions next month will lead to more opt-outs. It is estimated that between six to seven million workers who are currently paying the legal minimum level will be asked to contribute over £2bn extra between themselves and their employer.
However, Royal London has found that factors such as the national living wage, which covers more than 1.5 million of the lowest-paid workers in Britain and will be increased by 4.4 per cent in April 2018, will help keep members in their pension schemes. “As a result, the lowest paid workers, who might be thought to be most likely to opt out when contribution rates rise, will be guaranteed an increase in take-home pay *even allowing for the rise in pension contributions,” Royal London stated.
In addition, an increase to income tax and national insurance thresholds will also minimise the cut to member’s take home pay. Although this is only to keep pace with inflation, such increases will reduce the number of people who suffer a fall in take-home pay in April following the contribution rises. It seems reasonable to assume that an absolute pay cut would be far more likely to stimulate an opt-out than a nominal increase in take-home pay that is simply ‘lower than expected’.
Furthermore, Royal London said millions of people get an annual pay rise in April. Pension contributions for workers will rise by 2 per cent (or 1.6 per cent after tax relief), so even annual pay rises at the current average level of around 2.4 per cent would more than offset the increase in pension contributions, especially where workers are only contributing over a band of ‘qualifying earnings’.
Commenting, Royal London director of policy Steve Webb said: “The power of inertia remains strong – individuals will still have to actively opt out and the additional amounts they are being asked to contribute are still relatively modest, especially for the lowest paid workers who will be receiving a large increase through the national living wage. Evidence from the US suggests that when contributions into workplace pension schemes were gradually increased by a few percentage points from low single digit rates, opt-out rates were very low, and the same is likely to happen in the UK.
“We believe that relatively modest increases in contributions, combined with pay rises, especially for the low-paid, are unlikely to fatally undermine the success of automatic enrolment. The real focus should already be on how to get savers beyond the 8 per cent minimum level that they will reach in 2019 and up to more realistic levels.”