No sign of ‘notable uptick’ in AE opt-outs despite cost of living crisis

According to figures from the Department for Work and Pensions, published on October 26, opt-outs have fluctuated between January 2020 and August 2022, with the rate of those choosing not to be enrolled in a pension scheme rising since March this year, from 8.7 per cent to 10.4 per cent in August.

However, the stopping saving rate, which measures the proportion of AE active members who decide to opt out, cease saving or leave employment, was higher in mid-2020 and mid-2021 than it was in August 2022, where it stood at 3.1 per cent.

The cessation rate, defined as the proportion of actively saving members who decide to stop saving into a pension, rose from 0.49 per cent to 0.57 per cent between January 2020 and August this year.

We hope that people will recognise the importance of saving for retirement and view opting out of pension contributions as a last resort

Rachel Meadows, Broadstone

These figures are cause for “cautious celebration”, said Broadstone head of pensions and savings Rachel Meadows.

“While many people still face a tough winter ahead, there is little evidence so far this year of a notable uptick in pension opt-outs.”

Someone on a salary of £35,000, paying 5 per cent, would reduce employee contributions by £145.83 if they opted out of the scheme, however that means they would lose the matched contribution from their employer.

This would result in an overall loss of £350.04 over the course of the year, according to Broadstone.

“We hope that people will recognise the importance of saving for retirement and view opting out of pension contributions as a last resort,” Meadows added.

Quilter head of retirement policy Jon Greer said the introduction of AE was arguably one of the “most important and transformational” changes to pension policy in the past decade, however, it faces its biggest challenge yet as the cost of living crisis continues.

“There is a risk that as finances get stretched people choose to opt out of funding their retirement and choose to have that cash in their pocket today,” he noted.

“One of the reasons AE has worked is because it relies on people’s inertia but when push comes to shove and people are financially struggling, the worry is they take action and reduce or stop funding their retirement plans altogether.”

These opt-out rates are low but have been creeping up amid the pandemic and cost of living crisis, highlighted Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.

“There are no signs of these pressures abating as inflation continues to soar and so care needs to be taken to mitigate further opt-outs,” she added.

Auto-enrolment 10 years on 

AE was introduced after the Pension Act 2008, to require eligible employees to be automatically enrolled into a workplace pension.

It was rolled out between 2012 and 2017 in phases and currently has a minimum contribution of 8 per cent of earnings, with a minimum 3 per cent contribution from the employer.

Since AE was launched, pension participation has increased in every industry and occupation, in every region of Great Britain, and the total annual workplace pension contribution of all private sector eligible employees has risen from £41.5bn in 2012 to £62.3bn last year.

There remains a gender gap in the amount saved, with the real terms total annual savings for men rising from £29.8bn in 2012 to £40.2bn last year, compared with £11.6bn to £22bn for women between the same time period.

The total amount saved by women in the public sector was higher than men in 2012 and 2021, however, the DWP noted there are more eligible female employees in the public sector than males, meaning that average savings per woman may be lower than their male counterpart.

The DWP looked at data from 11 large private pension providers, which reported that between January 2020 and August 2022 the number of active members increased, and total contributions rose by 32 per cent in that period.

Morrissey said there have been calls for the Treasury to implement a timetable for next steps for the policy, such as reducing the minimum age from 22 to 18 and allowing contributions from the first pound earned.

“These measures would undoubtedly strengthen people’s retirement planning further but need to be balanced against current cost pressures, which can damage people’s short-term financial resilience.”

These reforms would result in a 3.5 per cent increase in long-term financial resilience by the end of 2029, according to Hargreaves Lansdown, however, this would need to be offset against the 3 per cent drop in surplus income and 3.3 per cent decrease in savings caused by inflation and the cost of living crisis.

“These reforms should be brought in but need to be timetabled far enough in advance so that any after-effects from the current cost of living crisis have disappeared,” Morrissey added.

This article originally appeared on FTAdviser.com