From this April auto enrolment pension providers are expecting to receive a further £7.2bn a year increase in contributions from the 9 million people paying into AE schemes, as the combined member and employee contributions rise to 5 per cent. This is on top of the £4.5bn a year they already receive from the current 2 per cent contributions and will rise by a further £7.2bn a year when contribution rates hit 8 per cent in April 2019.
This may sound like a bonanza for the industry, but the more I look at the hard facts around what these rises will cost consumers, the more I am convinced that we are in grave danger that nothing like these levels of contributions will be achieved. As part of our recent research study “Making Savings Affordable”, the FTRC research team began by looking at the impact of the forthcoming auto enrolment increases on the disposable income of consumers with national average earnings.
Very few people in the upper echelons of our industry have any real comprehension of what it is like to live on national average earnings, yet by definition, with such a wide member base, national average earnings or less is likely to be the income level of the vast majority of auto enrolment scheme members.
The present 1 per cent member contribution accounts for 4 per cent of the typical disposable income of someone receiving national average earnings. In April the increased 3 per cent member contribution will take this to 13 per cent and by April 2019 the 5 per cent member contribution will mean auto enrolment contribution will take 21 per cent of an average consumer’s income. Current members will be faced with a stark choice – opt out of auto enrolment or make significant reductions in the few luxuries they allow themselves on what are invariably already very stretched incomes.
Most worryingly, the April 2019 increase will mean that for these consumers their auto enrolment contributions will actually tip them over into spending more each month than they actually receive. The wider consequences of such pressure on income could be severe for the wider maintain their current contribution and the matching employer payment without opting out.
At the same time auto enrolment pension providers should move to capitalise on the changes made possible by Open Banking and deploy financial wellness apps that can help their scheme members more effectively manage the three key elements of income, expenditure and debt. My team has identified a number of case studies around the world where these services have had a significant impact on consumer spending. In one case in Canada when a bank deployed such a service, users reduced their monthly spending by between 4 and 8 per cent in just a few months – exactly the sort of change we need to see to make auto enrolment increases affordable.
Given the stark messages identified by our research, action is urgently needed. Despite the success to date of auto enrolment, I fear the industry has become complacent about the forthcoming levels of increases. It is almost too late to address this, but not quite. I am aware of a number of technology suppliers who have track records of deploying personal management tools in three to four months. In my view, any insurer that is not happy to see massive numbers of opt outs from their schemes needs to act quickly to put such services in place.