A step up in the level of minimum contributions to workplace pension schemes in the UK has resulted in a minor uptick in employees choosing to opt out of saving, according to a new study.
The research, carried out on the membership of master trust Nest by its Insight research arm and asset manager Vanguard, found that just under one in ten savers leave their pension scheme when newly automatically enrolled into payments of 5 per cent of their salary, matched by a 3 per cent employer contribution.
This opt-out rate of 9 per cent compared with 6 per cent for those newly introduced to saving at the previous minimum combined contribution of 5 per cent, phased out in April 2019. However, the researchers noted that overall participation in the auto-enrolment system, after opt-outs within the three-month window and cessation after it, remains well above many predictions at the policy’s outset at more than 90 per cent.
For comparison, drop-outs in similar US systems can reach close to 30 per cent, although the authors conceded that other factors such as healthcare expenses could impact Americans’ behaviour.
Increasing contribution rates when general pay levels are increasing, especially in an April when minimum wage levels rose substantially, is the best way to minimise any negative impact
Steve Webb, LCP
The study also vindicated the coalition government’s decision to phase the introduction of auto-enrolment, finding that existing members brought in at either of the two previous rates were less likely to cease their contributions than those brought in at 8 per cent.
Cessation rates rose by a sustained amount after April, but remained extremely low at under 0.3 per cent. However, members can also leave the scheme by a request to their employer, which is accounted for in a different measure – departure rates – that includes members who exit the scheme because they leave their job.
“The phasing-in of contribution rates really does seem to have worked,” said Matthew Blakstad, assistant director of Nest Insight. He said the research showed that where members have made it through the whole phasing process with one employer, they are “much more likely to stay in all the way”.
Re-enrolments work
Mr Blakstad cautioned that although the rise in opt-outs has been small, further increases could still result in a more significant change in behaviour.
“We’ve only got the empirical evidence of what we see here,” he said, but added: “It’s kind of obvious that the more you make people contribute, the harder they can find it.”
“We’re very alert to the fact that the population we serve are probably more likely to have constraints on their liquidity,” Mr Blakstad continued.
Insight’s trial of a sidecar savings model to help members balance short and long-term savings priorities is ongoing, and he said the model could prove especially useful as members deal with coronavirus disruption.
After the window for opting out has passed, younger members are more likely to cease participation than older ones, while the longer a member has been enrolled, the less likely they are to stop.
In a finding, the report labelled “both expected and puzzling” that members earning less than £15,000 are less likely to stop than those earning slightly more, perhaps due to the fact that this cohort feels a greater relative impact from measures such as the threshold for beginning contributions.
Another finding was that members who had been enrolled into Nest previously by a different employer – making up around 30 per cent of the master trust’s total enrolments – are less likely to opt out than the average across the board.
The size of the step up they experienced made a difference, however, as 5.2 per cent of members first enrolled at 2 per cent of combined earnings dropped out when forced to jump up to 8 per cent of salary at their next enrolment, compared with just 4 per cent opting out when both enrolments were at the higher rate.
Government must not let up
Steve Webb, partner at LCP and minister for pensions when auto-enrolment was launched, said the timing of the phasing to coincide with policies benefiting workers’ pay packets had helped mute any ill-feeling among savers forced to put aside more.
“This research demonstrates yet again the power of auto-enrolment, not only in getting people to start saving, but also in nudging them to save more,” he said.
“Increasing contribution rates when general pay levels are increasing, especially in an April when minimum wage levels rose substantially, is the best way to minimise any negative impact.”
Sir Steve took a stronger line on the next steps for government policy, insisting that further increases will be needed, but could be mitigated: “We need to learn the lessons of this research in order to plan further gentle upward nudges in contribution rates, timed to coincide with pay rises, as the least painful way to get contribution levels up to more realistic levels.”
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Gregg McClymont, director of policy at The People’s Pension, also said changes to the system are needed: “While the findings of this latest research are further evidence of the success of auto-enrolment, building on the policy’s success is necessary to make the UK pensions system work for the low paid, women and ethnic minorities.”
He pointed to the “significant” proportion of those who earn less than £10,000 in a single job, but may earn a larger combined total.
“For many of them, the state pension in retirement alone simply won’t be enough,” he said. “We appreciate that the government has other urgent priorities right now but, when the time is right, the age of eligibility for auto-enrolment should be lowered to 18.
“Policymakers could benefit more than 1m workers by reducing the earnings threshold from £10,000 to £6,240, and could also help lower earners build up the retirement pot they will need by making pensions earnings count from the first pound earned.”
