Is the time right for AE contributions to rise in 2018 considering political and economic volatility?
The pensions industry is undergoing a period of unprecedented change. We believe the Government should carry on and not disturb the planned contribution increases in April 2018 and 2019. Instead, we would like to see the Government tackle what we deem to be much more pressing matters that are affecting the success of the legislation overall. Our top recommendations (but not exhaustive) are that: the earnings thresholds should be abolished, along with the lower band qualifying earnings as they are both contributing towards the gap in millions of workers who are not eligible to benefit from a workplace pension.
The removal of these will ensure that many more UK workers could be considered for a workplace pension and enable them to save for their future retirement. We think that this will only add to the future success of auto enrolment policy. We believe that the best time to consider these enhancements will be in the upcoming 2017 auto enrolment review, which is currently taking place. One of our very own trustee directors, Jocelyn Blackwell is on the review board.
Will employers and employees be able to keep up/afford increased contributions in the current financial climate?
Auto enrolment is fast becoming a reality for hundreds of thousands of smaller firms across the country. Whilst auto enrolment policy has been heralded a success in terms of take up, there is still a long way to go with an estimated 6.3 million workers needing to be assessed by their employer.
Legislation already states that phased AE contributions will increase to 5% in April 2018 and 8% in April 2019. We believe employers have already budgeted for this. We support the recently published analysis by PLSA that shows that 8% is not enough and believe that what is needed is a long term plan to increase contributions to around 12% of total earnings.
Or, could increased contributions lead to higher opt-out rates?
We conducted research in July 2016 on over 2,000 UK workers and their attitudes towards minimum contribution rates. Strikingly, we found that four in five (82%) are happy for minimum contributions to rise in 2019, with 21% thinking that the maximum contribution rate of 5% come 2018, should be higher. But, there are also those that aren’t aware of how much they’re contributing with one in ten (11%) rising to almost one in five (17%) aged 55 and over.
In 2019, when workers are asked to pay in 5% compared to 3% from their employer, 24% said they would consider opting out when minimum contributions are imbalanced. If the roles were reversed and their employer contributed 5% compared to the worker contributing 3%, one in five (21%) say they would definitely not opt out.
Furthermore, two thirds (65%) of UK workers were not aware that minimum contributions only apply to earnings between a specific range. Our infographic a range of UK worker case studies, including part time workers, call centre agents, dentists and solicitors, on the effects that qualifying earnings has on their auto enrolment contributions.
The research found that:
- Four in five (82%) UK adults are happy for the minimum contribution to rise in 2019 with 61% agreeing that 5% is an adequate level whilst 21% think it should be higher than that.
- Almost half (46%) of those who have been auto enrolled into a workplace pension are contributing the minimum amount, whilst 42% are contributing more.
- One in ten (11%) aren’t sure how much they contribute, rising to almost one in five (17%) aged 55 and over.
- Whilst two thirds (65%) of UK adults were not aware that minimum contributions only apply to earnings between a specific range.
- Knowledge doesn’t improve amongst those who have been enrolled (37% aware) although it does amongst those who decided to opt out (49%) – perhaps indicating their reason to do so.
How can contribution levels be increased successfully? Could the introduction of auto-escalation be a possibility?
We believe that we need a long term roadmap that sets a path for the minimum employer contributions to increase to a level that provides adequate pensions. That level might be 12%, made up of 6% from employer and 6% from employee. It needs to be reached in a series of baby steps so that increasing contributions pose no threat to the economy.
As an example of which work groups this could greatly benefit, we recommend that the self-employed be brought into auto enrolment, utilising the inertia and automated decision making that employed workers enjoy. This should be facilitated through HMRC, increased National Insurance contributions and end of year tax returns, with a carousel system allocating the self-employed to one of several authorised and accredited auto enrolment providers.
 PLSA Report – Retirement Income Adequacy: Generation by Generation – November 2016