ACA backs further AE reforms despite small employer opt-outs

According to the Association of Consulting Actuaries’ 2018 Pension Trends report, 65 per cent of employers with fewer than 10 employees expected modest or substantial decreases in scheme participation from April 2019.

From that date, auto-enrolment minimum contributions will rise to 8 per cent, split as 5 per cent for employees (up from 3 per cent) and 3 per cent for employers (up from 2 per cent).

Despite the findings among small employers, the ACA and others have called for the government to set out its policy on contribution rates, arguing for a steady path of increases to improve the UK’s pension adequacy.

Serious consideration needs to be given to increasing the minimum DC contribution further beyond 8 per cent, which will clearly not produce the level of pension income most enrollees might be expecting

Malcolm McLean, Barnett Waddingham

When employers of all sizes were asked, the overwhelming majority of companies (75 per cent of the 349 surveyed) forecast no decreases in contributing members and 88 per cent said the April 2018 increase in minimum AE contributions had not had an adverse impact on scheme participation.

Although auto-enrolment is generally reckoned to be a rare pensions success, problems remain: more than 9.24m employees on low incomes, part-time workers or those too young or old are missing out.

Indeed, the survey found that typically between 26-30 per cent of employees are not eligible to be auto-enrolled into schemes, rising to 36-40 per cent at small employers. 

When the self-employed are included, upwards of 13m largely private sector workers are still not saving regularly for a private pension. This figure still far exceeds those successfully auto-enrolled, at 9.96m.             

Time to boost contributions

Commenting on the survey, ACA chair Jenny Condron said: “Our annual survey points to the need – part of which we see as an essential addition to the government’s ‘next steps’ pensions strategy – for a gradual but essential increase in the default level of savings into DC schemes.”

Condron said larger pots will mean savers are both adequately prepared for retirement and will have a range of options for how to spend the money in a useful way. Many current defined contribution retirees have taken their pot as cash.

The ACA has called for the Department for Work and Pensions to follow through by 2021 on its plan to remove the qualifying earnings bracket used to calculate contributions.

“At the same time, actions are needed to draw more of those on lower incomes and the self-employed into auto-enrolment levels of contributions, beginning with the gig economy’s quasi-employers,” Condron said.

From 2025, well-advertised contribution rises should be enforced to bring combined contributions up to at least 12 per cent, according to the association.

Experts back ACA call

Malcolm McLean, senior consultant at Barnett Waddingham, agreed: “The time is now fast approaching, where serious consideration needs to be given to increasing the minimum DC contribution further beyond 8 per cent, which will clearly not produce the level of pension income most enrollees might be expecting and will lead to much frustration and disappointment later on.”

Others have preferred to focus on tackling coverage first. Kate Smith, head of pensions at Aegon, said: “Auto-enrolment and paying into a pension needs to be the social norm for every single UK employee. This means removing the £10,000 annual earnings trigger gradually from the mid-2020s so that those who are low paid, particularly women, can benefit from an employer pension contribution."

Government appears unwilling

However, some experts have questioned the government’s dedication to further AE measures, particularly in light of its progress on removing the qualifying earnings bracket.

David Robbins, senior consultant at Willis Towers Watson, called for clarity for employers: “The government said it ‘will’ do this in the mid-2020s, but it told the Office for Budget Responsibility that this is only an ‘ambition’ which does not need to be factored into the fiscal forecasts."

He added that “if this change does go ahead, the effects will more often be felt directly at smaller firms – a big majority of FTSE 350 employers calculate pension contributions using basic pay from the first pound of earnings anyway”.

Rises may further strain employers

It is those smaller employers that have typically seen the highest rates of savers leaving their auto-enrolment scheme, according to the ACA report.

The current cessation rate for the median employer in the UK is between 11 and 15 per cent of staff, the study found, but this rose to between 31 and 35 per cent among companies with fewer than 10 employees.

Some experts are therefore calling for legislative caution.

“Auto-enrolment is crying out for a period of calm, allowing pension providers, employers and their advisers the opportunity to build on a successful start by boosting people’s understanding of retirement planning,” said Nathan Long, senior analyst at Hargreaves Lansdown.

He said the government “should ignore” calls to ramp up contributions immediately, citing the fragility of employers in the run-up to and aftermath of Brexit.

The ACA surveyed 349 employers sponsoring more than 550 pension schemes to compile the report.