DWP delighted auto enrolment opt-outs much lower than expected
by Dr. Ros Altmann
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Treasury will have to budget for higher than expected tax relief!
Encouraging progress in improving private pension coverage, but far more is needed – including annuity reform
Auto-enrolment among largest firms been successful in ensuring more people save in a pension: The DWP has released figures today showing that nine out of ten workers automatically enrolled into their employer’s pension scheme have decided to stay in. It is clear that, so far, auto-enrolment is a huge success in terms of encouraging workers to belong to their employer’s pension scheme and take advantage of the employer contribution.
Initial opt-out rates likely to be a maximum though: The DWP Survey among 50 of the largest employers (both public and private sector) shows that the vast majority of workers have overwhelmingly decided to stay in, once they have been enrolled automatically. The opt-out rate of 9% is far lower than previously might have been expected. There are a few reasons, however, why this figure is unlikely to exceed the proportion of workers choosing to stay in once all employees are enrolled in future.
Large employers have heavily promoted their schemes: Firstly, the largest employers have often spent significant amounts of time and money preparing brochures and materials on auto-enrolment to promote their schemes, and their HR departments genuinely wish to ensure that as many workers as possible stay in the scheme. Smaller firms are less likely to be quite as enthusiastic, especially those that have not offered pensions before. They are unlikely to be so willing or able to devote such resources to auto-enrolment.
Initial minimum contributions very low: Secondly, the initial auto-enrolment minimum contributions are only 1% of salary, whereas by 2018 the employee will have to contribute 4% (and the employer 3%, with an extra 1% from tax releif.) Therefore, workers will not see much of an effect in their pay packet from auto-enrolment deductions initially.
Markets have done well and publicity has been helpful too: Thirdly, markets have performed well recently, which has probably encouraged people to stay in the scheme so far. There has also been significant public promotion of auto-enrolment, which has added to its appeal.
Encouraging that younger workers have lowest opt out rates: It is certainly encouraging that the opt out rates among the younger workers are the lowest, since they will have more time to benefit from the compound growth of their savings.
Also good that the over 50s have higher opt-out rates – they are group for whom pensions more likely to be unsuitable: I am also pleased to see the over 50s having higher opt out rates, since the oldest workers are least likely to benefit from auto-enrolment. Indeed, they face risks if their auto-enrolment contributions result in them exceeding the amount of pension savings that can be taken out as a lump sum (called the trivial commutation limit). For example, if they have saved in pensions in the past, they may have a pension fund of nearly £18,000 and a small extra contribution via auto-enrolment could just push them above that threshold and mean they can no longer receive the lump sum and may need to take an annuity or other income. Those who are older will also be more at risk of losing means-tested benefits if they have a bit of extra pension income from auto enrolment when they retire. Therefore, higher opt out rates for older workers are welcome.
Dangers of workers feeling auto-enrolment will mean their pensions are sorted: Of course, it should also be noted that the level of contributions in auto-enrolment is currently nowhere near enough to provide anyone with a decent pension income in later life. Far higher contribution levels will be needed, just to make up for the future reductions in state pension as the State Second Pension is phased out. There is a danger of workers being misled into believing that the auto-enrolment level of contributions means their future pension requirements will now be taken care of. That is certainly not the case. More reforms and higher contribution levels will be required.
Annuity reform vital for future private pension adequacy: Reform of the annuities market is an urgent requirement for optimising outcomes of auto-enrolment pension savings in future. Currently, the annuity market is not working in the interests of the customer. Most of those buying annuities in their 60s are receiving poor value and often buy the wrong type of annuity, without understanding the risks of their decision. Most have no inflation protection and there is no automatic mechanism to ensure their partner can benefit from their pension savings too.
DWP delighted – Treasury may not be quite so pleased: Overall, however, the DWP will be pleased to see such low opt out rates. Whether the Treasury is quite as pleased with the higher level of tax relief than it might have previously budgeted for, of course, is another matter!