The increase in minimum contribution rates was widely feared, but has it really led to a rise in the number of members opting out of their company pension schemes?
Prior to the introduction of auto-enrolment, the Department for Work and Pensions expected overall opt-out rates to be around 28%. The actual level has averaged out at just 9%. Last year we argued that contrary to the conventional wisdom, the increase of contribution rates in April 2018 would be unlikely to affect opt-out rates significantly. Indeed, this has been the experience of one of our clients:
“Since the contribution increase in October, we haven’t seen any significant change in opt-out rates, which remain between 1% and 6% in most pay periods. For each of the past four quarters, the opt-out rate has been below 3%.”
Over 30,000 of their members were impacted by the increase, of which just 40 reduced their contribution rate back down to 1%. The experience across all our bundled clients has been very similar, with opt-out rates showing no jump in April and May.
Could opt-out rates fall further?
We believe that the overall level of opt-out rates will decrease with time. In recent studies conducted by the DWP and the National Institute of Economic and Social Research, opt-out rates were shown to be significantly lower when automatic enrolment was already in place. New workers come into an environment where pension savings have been established as normal practice which results in lower opt-out rates; the LGIM workplace experience to date also shows a steady decline in opt-out rates:
Please note that there can be approximately a three-month time lag for all opt-outs to be recorded.
Re-enrolment should also help: a recent study found that 62% of workers re-enrolled by medium-sized employers and 45% of those re-enrolled by large employers remained enrolled. Whether by an existing employer every three years, or at the point when an individual changes job, re-enrolment provides a ‘teachable moment’ when engagement may contribute to an individual remaining enrolled rather than opting out again.
Many employees already save at higher rates
So what about the next increase in 2019? We are confident that the recent increase in contributions and the one next year will not affect opt-out rates significantly. In addition to the behavioural reasons covered in our recent article, it’s worth noting that many employees and employers are already contributing at a higher rate than the minimum .
In 2016 around 44% of employees were already contributing 3% or above and around 27% were already contributing an employee rate of 5% or above.
Is it all worth it?
According to the DWP, an estimated £6.9 billion extra was saved into workplace pensions in 2017/18 as result of auto-enrolment. This is expected to increase to £13.3 billion in 2018/19 and to £19.7 billion in 2019/20, largely due to the increase in minimum contribution rates. So it would appear that auto-enrolment is indeed having a materially positive impact on the level of pension savings.
On the basis of the evidence so far, therefore, the original fears over large numbers of individuals opting out of their company pensions have proved wide of the mark. And what’s more, the overall volume of defined contribution pension saving has been growing rapidly.
While we cannot be certain whether future increases to contribution rates (coming next in the 2019/20 tax year) will have a sizeable impact on opt-out rates, all of the data we have gathered to date leads us to believe that opt-out rates should stay relatively stable.
Watch this space for future updates.
If your base case is that interest rates will rise faster than is already priced in, how much should you under-hedge? The answer could be less than you think.
Short-cuts have their place. If you can avoid complexity and effort, it makes absolute sense to do so. It gives you time to work on other projects, or in my case re-watch The Treble (1999), reliving the good ol’ days. However, when it comes to retirement income, short cuts may be counter-productive and nowhere is this more apparent than with the 4% rule.