Clear and simple communication is key to preventing opt-outs

On April 6, minimum required contribution levels for employers contributions will rise from 1 per cent to 2 per cent of qualifying earnings, while the minimum contribution for employees will increase from 1 per cent to 3 per cent. 

With the current financial pressures of rising cost of living, property prices and student loans, it is easy for employees to think they cannot afford it and decide to opt out

The whole idea of auto-enrolment is to help employees to save sufficiently for when they are no longer working, and so it would be a very great shame if this next phase saw many people drop out of the scheme.

Understand the impact of contribution increases

Being prepared ahead of time is therefore essential, and it is important to understand the impact of the changes, both on the employee and for the employer. 

First, if the employer is running a qualifying scheme alongside their auto-enrolment scheme, they need to review this to determine if it is still fit for purpose, or whether changes are needed to match auto-enrolment minimums.

The second consideration is whether the employee may be able to improve their situation by opting out of an auto-enrolment plan and joining a company’s non-qualifying plan, if they are eligible.

For example, they may find that a lower percentage contribution on their full pensionable salary equates to the same amount as a higher percentage on qualifying earnings. Together with the employer match in the main pension plan, they may receive more into their pension than staying in auto-enrolment, yet it will cost them the same.

The third issue is around cost. Will the employee simply believe that the increase in contribution level is too much and opt out? 

Back to basics

The key here may be two-fold; in explaining the impact of tax relief and that the increase may not cost employees as much as they think, and ensuring that individuals review and set their priorities – much like paying their mortgage or rent, which are essentials, pension provision is a further essential that cannot be ignored.

The whole area of pensions is often considered difficult. For many employees starting out in their careers and for who auto-enrolment often applies, 'pension' and 'retirement' are too far in the future to be concerned about now.

When regulations make it mandatory for employers to enrol employees into a pension plan, there is an associated duty-of-care to explain to employees how it works. Furthermore, pensions are one of the most expensive benefits to provide and so it is important employees value it. 

At Hays, we recently ran "Back to Basics on Pensions" seminars, explaining very simply how pensions work.

We clarified common examples of pensions jargon, and we helped them understand what we mean by an annuity and how a default fund works.

We also gave examples of how much the fund might be worth at retirement and how it could be used. Importantly, we showed how much it actually costs the employee after tax relief, and how much additional money was being given to them through that tax relief and through employer contributions. 

Rather than scare people off pensions, these seminars had the opposite effect – many employees increased their own contributions or switched from auto-enrolment into our own pension plan. 

There were three reasons for this impact – they understood how the scheme worked, they realised the amount of additional 'free' monetary support they received via the government or Hays as an employer and, crucially, they saw the impact of what it might mean when it came to funding their retirement.

Keep it clear and simple

Taking the time to talk directly to employees can pay dividends when having to explain complicated issues. Clear and simple communication is therefore key in this next set of auto-enrolment changes.

While employers will have to write and tell employees that their contributions will rise, this is not enough on its own. With the current financial pressures of rising cost of living, property prices and student loans, it is easy for employees to think they cannot afford it and decide to opt out. 

Planning for a secure financial future is essential – the role of the employer is to ensure that employees have sufficient information and understanding to make informed decisions about the benefits being offered to them.

If employers have explained the changes well, the hope is that the opt-out rate will be low, and at least we will have done our best to ensure that those who do decide to opt out will have done it with knowledge and understanding. 

Rosemary Lemon is group head of reward at global professional recruiting company Hays