Rise in opt-out rates prompts concern despite AE successes

Pension participation and contribution rates have surged since the introduction of auto-enrolment (AE) 10 years ago, although a slight increase in opt-out rates has prompted some industry concerns.

Data from the Department for Work and Pensions (DWP) revealed that pension participation has increased among private sector eligible employees in every industry and occupation between 2012 and 2021, including those with historically low rates of saving.

The largest increase in participation rates was seen for personal service occupations within the public admin, education and health industry, where participation rose from 14 per cent to 86 per cent.

This increased pension participation could also be seen across all regions of Great Britain, although the largest increase was seen in the West Midlands, where participation rose from 39 per cent to 87 per cent, while London saw the smallest increase, rising from 45 per cent to 85 per cent.

Total annual workplace pension contributions have also been on the rise, with the total pension contributions of all private sector eligible employees increasing in real terms from £41.5bn in 2012 to £62.3bn in 2021.

In addition to this, the number of eligible employees in the private sector making real terms total contributions above the 2021 AE minimum increased by 22 percentage points, while eligible employees making real terms contributions at the 2021 AE minimum increased by 23 percentage points.

The largest contribution increases in real terms were seen within the banking, finance and insurance industry, where savings increased from £11.1bn in 2012 to £17.8bn in 2021.

In contrast, energy and water was the only private sector industry where real terms total annual savings decreased, with real terms total annual savings falling from £2.1bn in 2012 to £2.0bn in 2021, although there was no isolated reason given for this.

Gender differences have continued, however, as although the total annual savings for women within the private sector increased from £11.6bn in 2012 to £22bn in 2021, it remained significantly lower than the £40.2bn annual savings recorded for men in the private sector in 2021.

Furthermore, although the total amount saved for females was greater than the total amount saved for males in both 2012 and 2021 in the public sector, the DWP explained that there are more eligible female employees in the public sector, and therefore average savings per eligible female employee may be lower than per eligible male employee.

More recent improvements have been seen, as the data showed that the number of active members of the 11 large private pension providers increased from January 2020 to August 2022, while the total contributions to these 11 providers was 32 per cent higher in August 2022 than in January 2020.

However, the DWP also confirmed that the the opt-out rate for newly enrolled employees was 10.4 per cent in August 2022, compared to 7.6 per cent in January 2020.

This slight increase has prompted concern amongst some industry experts, with Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, noting that while AE has seen pension savings "surge", there are some flies in the ointment.

"Opt-out rates have always been low but have crept up over the past year or so. This is likely because of the difficulties experienced during the pandemic and the current cost-of-living crisis," she continued.

"There are no signs of these pressures abating as inflation continues to soar and so care needs to be taken to mitigate further opt outs."

In contrast, Broadstone head of pensions and savings, Rachel Meadows, suggested that the latest figures are "cause for cautious celebration", noting that whilst savers still face a tough winter ahead, there is "little evidence so far this year of a notable uptick in pension opt-outs".

“We hope that people will recognise the importance of saving for retirement and view opting-out of pension contributions as a last resort," she continued.

However, AJ Bell head of retirement policy, Tom Selby, noted that while the figure remains "relatively low", this could be set to rise, with previous research from the provider revealing that around a third of people having either already quit their workplace pension or considering doing so in response to rising living costs.

“The government will undoubtedly be nervously watching those pension participation rates, and for some savers the double hit of rising energy and housing costs will inevitably be the straw that breaks the camel’s back," he stated.

“Although times are clearly tough, anyone considering stopping saving in their workplace pension during the cost-of-living crisis shouldn’t do so lightly."

Broader changes may be needed, as Morrissey highlighted recent calls for the government to outline a timetable for next steps, most notably the introduction of the measures announced in the 2017 auto-enrolment review, including reducing the minimum age to 18 and allowing contributions from the first pound.

"These measures would undoubtedly strengthen people’s retirement planning further but need to be balanced against current cost pressures which can damage people’s short-term financial resilience," she continued.

"These reforms should be brought in but need to be timetabled far enough in advance so that any after-effects from the current cost of living crisis have disappeared.”

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