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Chris Curry: Industry must play auto-enrolment contribution rise right

Chris-Curry-700x450.pngThis month sees the increase in higher minimum automatic enrolment contributions. Up until now, the minimum has been 2 per cent of band earnings (at least 1 per cent of which must come from the employer), which will now go up to 5 per cent of band earnings (at least 2 per cent of which must come from the employer).

This has, understandably, led to feverish discussion as to how individuals are likely to respond.

While the very low opt-out rate of less than 10 per cent choosing not to join their workplace pension scheme has been one of the big success stories of auto-enrolment, it is often pointed out this could be because contributions are so low.

So how will individuals respond? It is difficult to predict, although a lot is resting on it.

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The recommendations of the 2017 auto-enrolment review to extend it to 18 to 21 year olds and to make pension contributions payable from the first £1 of earnings are, to an extent, conditional on the phasing in of contributions not leading to a big reduction in savers.

Behavioural theory suggests inertia will continue to be the dominant factor. Evidence from the US suggests that, in auto-enrolment plans where contributions are phased in over time, the numbers stopping after each contribution increase are relatively low – although in many cases those individuals knew what was coming.

And inertia will be helped by the timing of the increases being at the same time as rises in income tax personal allowances, National Insurance thresholds and, in some cases, pay increases that will offset them at least in part.

Individuals also have more to lose from leaving the pension scheme. The minimum employer contribution will be 2 per cent of band earnings rather than 1 per cent, so stopping saving has a bigger impact on overall remuneration than before. Communicating this to people thinking of leaving will be important but no doubt very challenging.

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It is also worth bearing in mind that not everyone will be affected by the change. In 2016, over half of employees eligible for auto-enrolment were already paying contributions of more than 2 per cent, so would not be affected by phasing.

So, there are plenty of reasons to be optimistic but not complacent. Given the current (and expected future) squeeze on pay for many people, there will be some who find the increases unaffordable and who will leave. Even in this case, individuals will be re-enrolled three years later, and current evidence suggests re-enrolment is as powerful as initial enrolment.

It is vital the changes in pension scheme participation are measured accurately so that any future changes to auto-enrolment are evidence based and more likely to lead to better pension outcomes.

This will not be easy, as the changes will not be in opt-out (which refers to those leaving within six weeks of being enrolled) but in scheme leavers (or cessations), which are harder to measure and interpret. But without good data, it will be harder to know whether further increases in minimum contributions would lead to higher levels of saving or not.

Chris Curry is director of the Pensions Policy Institute

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