Providers eye departure from defaults in workplace success stories

Nest, the mastertrust set up by statute to serve the lower end of the market, found in a study of its membership that ongoing opt-out rates had been 6 per cent on average, with the limited proportion who had reached their three-year re-enrolment achieving a participation rate of 87 per cent.

It’s too early to say whether this suggests that this means we need to increase those auto-enrolment minimum rates

William Allport, Vanguard

More strikingly, some 8 per cent of members, potentially those who do not meet the qualifying conditions for auto-enrolment, chose to join the scheme anyway.

Savers volunteer to level up

Meanwhile a separate study looking at the workplace membership of Hargreaves Lansdown found that over 50 per cent of members contribute more than the minimum rate chosen by their employer.

Savers with more than £10,000 in their pot were more than twice as likely to increase their contributions as those with less than £5,000, suggesting that a sense of ownership and engagement develops as savings build up.

That led the provider to suggest that the government should not ramp up minimum contribution rates, further than the combined 8 per cent currently envisaged by legislation.

The Department for Work and Pensions has already chosen to defer the question of contribution rises, opting to focus its review of auto-enrolment solely on questions of coverage and engagement despite calls from some quarters to tackle adequacy problems now.

Nathan Long, senior pension analyst at Hargreaves Lansdown, said this hesitation was justified, given the emerging evidence of voluntary scaling up.

“People don’t really care if they’ve got a small pot. As soon as the pot becomes a bit bigger people are more interested,” he said, cautioning that a renewed focus on quality engagement would be needed to see these good habits continue.

Several studies have suggested that contributions of around 12 per cent will lead to a satisfactory level of pensions adequacy.

“There’s an argument to say you shouldn’t make people pay all that 12 per cent for the future into a pension,” said Long, suggesting that individual savers may prefer to share contributions between pensions and Isa products, in a blended system of defaults and flexibility.

While wealthier savers may enjoy the flexibility to vary their saving rates in accordance with their personal circumstances, policymakers will also have to consider the potential for poor pension adequacy among lower earners, and the call on state resources this could create.

Is £3,000 enough?

Crucially, Nest’s survey was accurate as of the end of January, before data could be gathered about the impact of phased increases to minimum contributions.

It projected that a typical 22-year-old on low earning could generate an income of around £3,000 per annum in retirement in today’s money, which combined with the state pension would lead to a replacement rate of around 55 per cent.

For William Allport, senior retirement strategist at Vanguard, the manager that worked on the Nest survey, this fairly meagre outcome did not signal a need for a step-up in contributions.

“It’s too early to say whether this suggests that this means we need to increase those auto-enrolment minimum rates,” he said. “£3,000 of annual income is really really meaningful to this cohort.”

He said Nest’s evidence of voluntary saving shows the benefits of auto-enrolment as “a solution to the mechanism of retirement saving as much as the introduction of minimum contribution rates”.

Nest savers opt in

Over a quarter of a million members, representing 8 per cent of Nest’s membership, were voluntary savers in the scheme. This population were disproportionately female, young and on low incomes.

Many industry experts have called for the coverage of auto-enrolment to be increased to groups currently left out, such as those on low incomes.

But Will Sandbrook, executive director of Nest’s Insight unit, cautioned that this may force people into saving that they cannot afford: “The inertia that comes out of auto-enrolment is very very powerful.”

He said evidence of positive voluntary behaviours and increased contributions raise “an interesting question about whether more could be done from a communication and engagement perspective”.

DWP in no hurry to raise rates

If minimum contributions are only set to guarantee a minimum acceptable outcome, they may be set for the right level in the long term.

Charlotte Clark, director of private pensions and stewardship at the DWP, said: “For low earners I think 8 per cent is probably about right, for a millennial who has come in and saved their whole life.”

But if policy wants to ensure good outcomes rather than minimum outcomes, behavioural economics may hold further suggestions for contribution rates.

Research by economist Shlomo Benartzi has suggested that opt-out rates are unlikely to significantly increase until US members are auto-enrolled at rates of 11 per cent or more.

Equally, if the rates of enrolment are a suggestion, there is evidence that people will reduce high contribution rates to a palatable level, rather than feeling locked into unaffordable rates by inertia.

“I’d probably set it as aggressive as I think is right for most people, but I’d also make it really easy to change,” Benartzi said.