The rise in contributions is likely to spook employees but the industry must help them focus on the many positives
Next week brings with it a significant day in the world of pensions. On 6 April, for the first time in more than five years, automatic enrolment minimum contributions are going up.
To ease people into the idea of pension saving when auto-enrolment first began back in 2012, levels were set at 2 per cent of banded earnings, split between employer and employee.
Next week, that will rise to 5 per cent, with employers typically paying in 2 per cent and employees 3 per cent.
I had expected to see the media coverage around this ramp up ahead of 6 April, but am concerned a lot of it has focused on the possible negatives – opt-out rates, affordability issues, pay rises not keeping up with inflation and so on.
These are all important considerations, but such messages should not drown out the significant positives.
Cast your mind back to 2012 and we were in a very similar place. In the build-up to the introduction of auto-enrolment, there were all kinds of doomsday predictions about the level of opt-outs. Our own research from back then even predicted a potential opt-out rate of around 30 per cent.
As well as this, there were concerns about a capacity crunch in the market, providers not being interested in smaller businesses and potential outrage from employers and employees.
In reality, however, there has been very little evidence of that in the past five years. Opt-out rates are less than 10 per cent, the capacity crunch did not materialise, plenty of providers created slick digital platforms for smaller companies and nine million employees and a further one million employers have been through the process.
Thhere is no doubt these contribution increases are again going to shake up the market and put workplace pensions under the spotlight. But this is why we as an industry need to do all we can to highlight the benefits.
Roll out this list of the advantages of a workplace pension to clients:
- Your employer pays into it;
- The Government pays into it;
- It is invested on your behalf;
- The charges are capped at
0.75 per cent;
- You do not need to do anything to benefit from all of the above, other than pay in minimum contributions.
When you look at it like that, the workplace pension looks like a pretty amazing product.
In fact, our research has even shown that a typical auto-enrolment pot could grow by 30 per cent this year.
I am not trying to minimise the challenges that increasing contributions will bring. I know there will be affordability issues for the lowest paid and some employers may be forced to make difficult decisions, but it is important to look at the bigger picture.
The population is ageing and people are spending longer in retirement than ever before. An £8,000 state pension on its own is not going to allow people to have much of a life when they stop working. It is, therefore, vital that they realise they are now in charge of their own destiny.
I am not going to make predictions about what will happen when contributions rise next week. Recent events such as Brexit and the general election have taught us that the British public are notoriously difficult to read.
What I do hope, though, is that employers and employees take this opportunity to re-engage with their workplace pension, understand how it works and the benefits it delivers, then make the decision that it is best for them in the long term.
John Lawson is head of financial research at Aviva