Members favour scrapping the option to opt out of auto-enrolment minimum contributions, recent research has found, as experts highlight the need for better guidance around the levels of saving required for retirement.
Seventy per cent of workers would like the government to introduce a compulsory contribution rate as a total percentage of their monthly salary into their defined contribution pension, according to a survey of more than 500 DC scheme members aged 30 to 69 by BlackRock.
A clearer message should be sent that 8 per cent is not sufficient
Mark Futcher, Barnett Waddingham
People want guidance
Claire Finn, head of UK DC pensions at the asset management company, said: “That really points to the fact that people need help in terms of knowing how much they should save.”
The survey also highlighted that while auto-enrolment rates are due to reach 8 per cent in April 2019, this could create a false sense of security among workplace pension savers in terms of how much they need to save.
“Contribution rates in DC need to be higher,” said Finn. She noted that auto-enrolment has “been a huge success” so far.
"What we need to do is to make sure that we don’t stop at 8 per cent and therefore we don’t send the message to people that 8 per cent is sufficient for them to be saving for their retirement,” she added.
The recommended contribution rate “needs to keep escalating, and we would recommend closer to the 15 per cent mark”, Finn said, noting that it also depends on people’s individual circumstances.
Adrian Boulding, director of policy at Now Pensions, agreed. Most people “would just like to be told how much to save, so I think we need to keep on moving those default contribution rates… upwards” he said.
Compulsory contribution rates
Others say compulsion brings its own risks. People might want a compulsory rate to make sure they save a sufficient amount, “however, we know the current contribution levels are not enough”, argued Lydia Fearn, director and head of defined contribution at consultancy Redington.
“There is a concern that people will think that the compulsory rate is enough and so may not look to save more,” she said.
She added that it may also have implications for smaller employers who already struggle with auto-enrolment compliance and budgeting correctly.
However, this fear might be overplayed. Darren Philp, head of policy at mastertrust the People’s Pension, said when it comes to employers, “their attitudes to increasing contributions may not be as hostile as everyone may think”.
He pointed to People’s Pension research showing that more than a third of SMEs were already paying a higher contribution rate than 1 per cent, with four in 10 agreeing that automatic enrolment has been a good thing for their business.
Increases to AE contributions
Niall Alexander, co-head of DC solutions at consultancy P-Solve, agreed that a government mandate of 8 per cent implies a belief that contributions of 8 per cent of qualifying earnings, plus the state pension, is sufficient for retirees to live comfortably.
What have we learnt from auto-enrolment so far?
Roughly 6.8m individuals have been auto-enrolled into a workplace pension so far. This has led to 15 per cent annual growth in the UK’s defined contribution market, which could move it to £900bn in less than 10 years, from currently from £300bn.
“Much higher contribution rates are needed for DC savers to be able to comfortably retire,” he said.
However, David Snowdon, director of institutional DC solutions at SEI, said it is too early to mandate higher contributions. “We will need to assess the impact of the upcoming increases to AE contributions over the coming years – and any subsequent rise in opt-out rates – before making any bold suggestions as to how high… contributions could or should go”.
The research also found that, almost five years since the introduction of auto-enrolment, 43 per cent of people do not know how much they should be saving towards retirement.
Mark Futcher, partner at consultancy Barnett Waddingham, said he was surprised by this figure.
“People are still in an outdated mindset of what retirement is,” he said.
Futcher predicted a big shift in the working patterns of people, which will 'softer' retirements. He noted that “this means no cliff-edge moment and a clearer understanding of their needs for retirement, albeit for the [current] generation a little too late”.
He added: “A clearer message should be sent that 8 per cent is not sufficient.”
