More needs to be done to communicate the outcome of having minimum contributions rise twice in one year
In six months’ time, something momentous is going to happen – and I am not talking about Brexit. Auto-enrolment minimum contributions are going to rise for a second time.
Millions of workers will be asked to start paying a total of 8 per cent of their earnings into their workplace pension. That is split between the individual, their employer and tax relief, but it will be the second rise in the space of a year.
Having two increases to minimum contributions in such a short space of time has always been seen as risky. But the British workforce appears to be adapting to this new way of saving.
Almost 18 million people are now saving into a workplace pension – a record high – and almost 10 million of those have come through auto-enrolment.
But the average amount being saved has hit a low, driven in part by the low auto-enrolment minimum contribution level of just 2 per cent from 2012 to 2018.
It is these statistics that show exactly why auto-enrolment minimums have to rise.
Even when it does go up to 8 per cent in April, that still will not be enough for most people to achieve a reasonable retirement.
We have been calling for minimums to rise to 12.5 per cent by 2028. Our calculations show that the level of saving means more people have a better chance of achieving a decent standard of living in retirement when the state pension is included.
You and I understand that saving into a pension is a good idea. It helps people prepare for their future, they get free money from their employer and it is tax efficient. But people face many financial pressures which mean looking to the long term can be difficult. Not to mention that two increases in 12 months could mean a hit to take-home pay.
In basic terms, someone who was contributing £20 a month up to March this year will be contributing £100 a month by May 2019.
The known unknowns
We do not know how people are going to react to this second contribution rise. When auto-enrolment was introduced in 2012, opt-out rates were predicted to be up to 25 per cent but they have actually been less than 10 per cent.
In April, increases in opt-outs were expected again – but that does not seem to have materialised in any great number.
We have run a survey to get people’s views on auto-enrolment and what they think they will do when the increase happens.
Nine per cent of people said they will opt out, 21 per cent said they will leave it a couple of months and see how the increases will affect their pay, while 55 per cent say they will carry on paying in as normal.
I am pretty encouraged by this. It is worth remembering that what people say they will do now and what they will actually do in six months’ time may be two different things. And inertia has been a powerful tool in the success of auto-enrolment, so having one in five people say they will wait and see is another positive.
What is perhaps more concerning is the low level of awareness.
The survey found a pretty equal three-way split when it came to knowledge of what was going to happen. A third said they knew all about the increases, a third said they knew something about them and a third were not aware at all.
Interestingly, or perhaps worryingly, the highest proportion of people unaware of the increases are the 45 to 54-year-olds – those people approaching the age where they can begin accessing their pension savings.
Work needs to be done to raise the profile of the auto-enrolment increases to ensure everyone understands the benefits. This falls to everyone in the industry.
While someone paying auto-enrolment minimums may not have the typical profile of someone who seeks out advice, that position can change over the years. As people switch jobs, they gather more pension pots, which eventually they will need to make a decision about – perhaps with help from an adviser.
I really hope the changes to auto-enrolment do not get lost in all the noise around Brexit. Clearly, whatever is decided between the UK and Brussels is going to have an impact on all our futures – but so will how much we choose to save for our retirement.
John Lawson is head of policy at Aviva