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