Savers auto-enrolled into a pension scheme are not dropping out of their plan any faster when nudged toward saving more money each month, according to the Pensions and Lifetime Savings Association.
The number of members stopping pension contributions to the UK’s three largest master trusts has remained virtually unchanged since the minimum level of combined contributions increased from 2 per cent to 5 per cent in April, the industry body revealed on Monday.
These figures show that automatic enrolment is working and transforming retirement for millions of people
Esther McVey, Department for Work and Pensions
The findings suggest that savers are not as sensitive to cuts in their disposable income as feared by some in the pensions industry, and have led to calls for further increases to bridge the UK’s retirement savings gap.
In the three months before the automatic rise in contribution rates took effect in April, 3.3 per cent of Nest, Now Pensions and The People’s Pension members stopped saving with that provider. This metric includes those who stopped saving because they switched jobs, or because their employer changed provider.
In the three months following the April increase, the average rate remained virtually unchanged at 3.5 per cent.
Opt-out rates, which measure the number of people who leave their scheme within a month of joining, stayed unchanged at 6.2 per cent on average for the three master trusts.
The good news prompted Esther McVey, the secretary of state for work and pensions, to hail the success of auto-enrolment.
“These figures show that automatic enrolment is working and transforming retirement for millions of people,” she said in a statement. “The proportion opting out or ceasing saving remains low as contribution rates increase, helping people save markedly more for their retirement.”
Contributions must rise to reach adequacy
However, the biggest challenges arguably lie ahead for auto-enrolment. Combined minimum contributions will rise again to 8 per cent from April 2019, with employees bearing the most of the brunt at 5 per cent.
Pensions experts also know that this level of saving will not be enough to transform the retirement prospects of most people in the UK.
An employee auto-enrolled in 2012 at the policy’s inception on an average salary will have a pot of £16,251 by 2024, including the impact of the rise to 8 per cent.
The PLSA’s own ‘Hitting the Target’ report suggested that combined contributions should rise to 12 per cent, although it proposed a phased approach, gradually removing the lower earnings limit on contributions and reaching its target rate by 2030.
Nigel Peaple, the PLSA’s director of policy and research, said: “With many people assuming the minimum level of contributions is the government’s ‘recommended amount’ to save, we want government to increase contributions to 12 per cent of total income to ensure more people can have a comfortable retirement.”
“In order to make this affordable for savers, this should be split 50:50 between employers and employees and be introduced gradually over the late 2020s,” he continued.
Department for Work and Pensions sources said the government’s position has not changed from its AE review in December last year, when it deferred contemplating increases until after the current increases have been phased in, although they added that the department is closely watching emerging evidence.
Of course, the fact that opt-outs have not spiked in response to one increase does not mean they will not increase in future.
Hayley James, a PhD student at the University of Manchester Institute for Collaborative research on Ageing, warned against policymakers being lulled into “a false sense of security”, particularly with regard to younger savers.
Research authored by James for the Pensions Policy Institute in July found that “threshold adults”, classed as those between 25 and 39 years old, are following inertia in auto-enrolment, but have not increased beyond minimum due to legitimate medium-term goals such as saving for a house.
As minimums increase, the danger is that pension saving begins to encroach on those shorter-term goals, which James said her research showed would take priority.
“There must be a threshold where they would be forced to think about it,” she said. “Is that really the way we want them to wake up to pension saving?”
