The success of automatic enrolment is in danger of being “oversold” once April 2019 contribution increases go through, it has been said.
Speaking at Barnett Waddingham’s defined contribution conference yesterday, 12 September, Walgreaves Boots Alliance group director of pensions Julie Richards said that auto-enrolment could be in a “honeymoon period” following the low opt-out rates after the last contribution hike.
Minimum employee auto-enrolment contributions rose from 1 per cent to 3 per cent in April 2018, and is set to rise again to 5 per cent in April 2019.
Richards said: “The thing with AE is, I’m not saying it’s a bad thing, I’m just saying that there is a danger we have oversold it. I don’t think you can judge its success until we see the April 2019 contribution increases go through.
“The 1 per cent to 3 per cent is not a huge difference, but the move from 3 per cent to 5 per cent, when you have people on living wage, I wonder if in a couple of years’ time we’ll look back and say yeah, it was a bit of a honeymoon period and now it is going the other way.”
Yesterday, Work and Pensions Secretary Esther McVey hailed a “pensions revolution”, driven by the success of auto-enrolment, which has resulted in almost 10 million people saving for retirement.
However, the Office for National Statistics warned last week that average contributions into private sector DC pension schemes during 2017 fell to 3.4 per cent from 4.2 per cent in 2016, and have decreased significantly from 2012’s level of 9.7 per cent.
Also commenting on the future rise, Barnett Waddingham head of workplace wealth, Mark Futcher, said: “It is not the contribution itself, it is the amount it represents of their disposable income and when it jumps up to 5 per cent it will be about 25 per cent of that disposable income, and that’s what is going to drive the opt-out rate. It comes back to affordability, people making a choice when they don’t have a choice.”
Despite the increases, some experts argue that the level of savings will still not be enough, advocating contribution rates closer 14 per cent of salary.