Opt-outs from auto-enrolment schemes have been lower than industry expectations. Initial projections ran at around 30 per cent, yet experience to date has shown figures of less than 10 per cent on average. Nest reports an opt-out rate of just 8 per cent. As a result, the Department for Work and Pensions has revised down the net projected opt-out rate across all employers from 30 to 15 per cent.
However, given where opt-out rates are currently, this new projection suggests SMEs will actually see an increase. In fact, based on Nest’s experience to date, the DWP’s projections would represent a doubling of opt-out rates when smaller firms begin to stage in earnest.
Higher employee contribution rates from October 2017 will mean 3 per cent employee contributions are followed shortly by 5 per cent contribution rates, creating immediate affordability issues. It is unfortunate that those least likely to have had access to a pension to date may be presented with a greater “pay slip shock” than those who work for larger companies and have had time to get used to 1 per cent contribution levels.
Workplace dynamics in the SME sector certainly do not get any simpler compared to those of their larger counterparts. According to DWP research, part-time workers are twice as likely (18 per cent) to opt-out than full-time staff. If they have multiple employers and choose not to save into a pension then this will be recorded as multiple opt-outs. Clearly, as the workforce sizes fall, the percentage impact of an individual opting-out will increase.
The DWP research also showed that the motivation to opt-out was not simply down to affordability. One might expect a higher proportion of the younger workforce (those under 30) to opt-out due to competing financial priorities. In actual fact, the highest opt-out rates (23 per cent) are seen in the over-50s, with the two primary drivers being adequate existing pension provision and being too close to retirement for the new contributions to make a difference. In contrast, the youngsters have opted-out at a rate of just 7 per cent.
With around 83 per cent of employers yet to stage without having an active pension scheme in place for staff, I expect levels of existing pensions saving to fall. An employer or an accountant running auto-enrolment within payroll is in no position to provide the rounded support employees really need. The person that is, however, is an adviser.
A note of caution: opt-out rates only measure the number of employees specifically choosing to leave the pension scheme within the first month of enrolment. Where an employee remains part of the scheme through the first month and then ceases to pay into a policy at a later date they are not included in these statistics. The Pension Regulator states the number of employees ceasing membership at a later date may add a further 2 per cent to the number not participating in pensions. In truth, this figure is impossible to know unless the data is tracked over time. Once we reach the increased employee contribution levels in 2017 and 2018, we are likely to see increased levels of cessation.
What is really encouraging, however, is that once employees have been auto-enrolled, they value the quality of their pension scheme more (up from 9 per cent pre-staging to 17 per cent post-staging, according to Nest). In addition, those employees who do opt-out are significantly less likely to opt-out again in three years’ time: just 19 per cent said they would stay in a second time around when asked in 2013 but this figure had risen to 41 per cent in 2014.
According to TPR’s Q2 summary and analysis, 12 per cent of employers have brought their scheme’s staging date forwards. Clearly, of those employers, many were not driven by a sense of altruism but caught in the context of a larger payroll. Still, I am sure we have all worked with employers for whom moving their staging date forward simplified things by aligning with other benefits or their company’s financial year, or looked prudent given the impending and much heralded capacity crunch.
With help from advisers, many employers will see the value of a quality pension scheme in driving staff engagement and perhaps even bring their staging date forward to lock-in the perception they are an employer of choice.
Tom Nall is director of workplace solutions at SimplyBiz