Auto enrolment is going well but British businesses are braced for change.
Research we recently carried out with nearly 700 firms showed that a large proportion expect the government to make changes to the policy in the future.
In many ways, this is no surprise, as government has made it clear that it will look at whether the amounts being paid into pension schemes are sufficient and look to make changes to ensure that auto enrolment delivers on its aim of providing people with comfortable retirements above the level of means tested benefits.
But, what I found most interesting about this research, was that over half (53%) of businesses surveyed expect the government to make workplace pension saving compulsory, with no ability for savers to opt out.
Given the fact that opt out rates are currently low – around 9% – compulsory pension saving isn’t something that government has mooted in recent times. But, if the upcoming contribution increases result in a significant rise in the number of people turning their backs on workplace pension saving, the government may need to consider putting compulsory pension saving back on the table. Otherwise, those that do save will end up subsidising those that don’t in retirement.
However, if opt outs remain low, then this should give government confidence to look at ways of increasing contributions. Indeed, over a quarter (28%) of businesses we spoke to said they thought it likely that beyond 2019, the government would look to increase auto enrolment minimum contributions beyond 8%. A similar proportion (27%) thought that the government might look to re-balance contributions so that employers paid either the same or a greater proportion than employees.
Both of these scenarios seem more likely to me than compulsion. For example, while the 2017 auto enrolment review didn’t specifically look at the question of adequacy it did say that Government would “carry out further work on the adequacy of retirement income”. There’s widespread agreement amongst demographers that an 8% contribution won’t be sufficient for a comfortable retirement and increasing contributions over time is a move that we would support.
But, we do think that there is a question to be asked regarding who shoulders this increase.
Research carried out by the Pensions Policy Institute (PPI) last year found that UK employers are bearing a smaller share of the burden of contributions than in other countries that have nationwide automatic enrolment or DC schemes.
Examination of pension provision in Italy, New Zealand, Japan and Denmark revealed that UK employers making auto enrolment minimum contributions will be bearing just 37.5% of the contribution burden when auto enrolment is fully rolled out, compared to 84.8% in Italy, 66.7% in Denmark and at least 50% in Japan. In New Zealand employers also pay half the contributions for members enrolled at the default level.
Research we carried out with auto enrolled savers revealed 24% “definitely will” or “might” opt out when minimum contributions hit 8% of qualifying earnings in 2019. But nearly three quarter, 74% of these say they would either “definitely” or “probably” continue to save into their workplace pension, if contributions were rebalanced and employers put in a minimum of 5% with a 3% staff contribution.
Over time, restoring the balance between employer and employee contributions could help to minimise opt outs. Encouraging contributions in this way is a rather more subtle approach than the brute force of compulsion. And equal matching contributions work will with a sense of fairness that underlies many human behaviours.
So, while compulsion doesn’t seem likely in the short time – businesses are certainly right to assume there will be change. I’m sure policy will be introduced gradually, but it would be sensible for employers to include higher pension contributions in long term budgeting.
Adrian Boulding, Director of Policy, NOW: Pensions