People should be given the flexibility to reduce their auto-enrolment contribution rates if a rise in opt outs is to be avoided says Opt Pensions director Garry Crackle
So far, auto-enrolment is largely deemed to be a success. Since 2012, some 7.6 million more people are now saving into a pension pot many of whom will be saving for the first time and hence beginning to develop a savings habit. A 90 per cent engagement rate is, by most standards, high, although total contributions so far are still only in phase one.
But for those on lower salaries who have not saved before or have been unable to save before, the jump from a 1 per cent contribution to 3 per cent could be counter-intuitive and lead to a raft of opt outs. I can’t help but wonder if a degree of flexibility in employee contributions for those on lower incomes might offer a solution to lessen the impact of this jump.
Recent research from Royal London Asset Management found that auto enrolment is popular among millennials, with 71 per cent deciding not to opt-out after being enrolled. According to the research, if the total contribution increased to 5 per cent – with a 3 per cent contribution from the employer and a 2 per cent contribution from the employee – nearly three quarters said they would continue to save in their pension. However, if the total contribution rises to 8 per cent – 5 per cent for the employee and 3 per cent for the employer, the number of millennials prepared to continue to save dropped to nearly two thirds.
The Pensions Regulator is doing a fine job in the roll out of AE albeit with a few issues that have needed ironing out along the way, but that is to be expected. Easing people in to cultivate a habit of saving, I would argue, is vastly more sensible and will be far more effective over the long term, rather than put them off entirely over the short term.
This is why AE scheme members need flexibility in their contribution rate whereby they can flex contributions up or down depending on individual circumstances at any point in time. It would help to support those on lower incomes where every penny genuinely counts and at the same time ensure they stay opted in and at least contribute what they can when finances allow. Good scheme providers could easily accompany statements with regular prompts to encourage an increased contribution is made at the member’s discretion.
Furthermore, this doesn’t take a change in legislation to enact. In a recent conversation with TPR, we were informed that allowing flexibility in contributions was wholly dependent on the conditions laid out by the board of directors for the scheme in question. In essence, any scheme can offer this flexibility and remain compliant with TPR’s requirements.
We need to cultivate a savings habit, but that takes time, particularly when you’re telling an already squeezed British household they’ll suffer in retirement when the here and now is equally trying. Even a 3 per cent commitment by a household living from pay cheque to pay cheque – and you only have to read the news to know that covers a considerable number of people, most of whom are on lower incomes – can be deemed unaffordable.
Whilst blindingly obvious, starting saving into a pension at the age of 25 will leave you with significantly more in your pot than if you delay it. Yes, we live in an ageing population were people will live and need to support themselves for longer, but they are also more likely to work for longer. Indeed, the retirement age will rise to 66 in 2020 and further increases are planned.
Leaving this to one side, taking into account the aforementioned 10 per cent of eligible workers that have chosen to opt out so far, once self-employed and non-eligible workers are included, an estimated total of 13 million people are expected to be outside of pension saving by 2019.
Perhaps a degree of flexibility which mirrors affordability might actually lead those thinking of opting out to have a change of heart.