Opt-outs are a red herring, contributing must be compulsory

Donia O’Loughlin

Data from the National Employment Savings Trust today (30 September) seem to confirm the government’s claims of lower-than-anticipated auto-enrolment opt-out rates, with just 9 per cent of employees at the large firms so far ‘staged’ opting not to begin contributing.

Last month, data from the DWP revealed that opt-out rates for auto-enrolment across the board averaged 9 per cent between October 2012, when the first employers were staged in, and April 2013.

Nest’s figures, covering the first full year of the new rules being in pace, mirror this. However, while the numbers are undoubtedly positive and will be proclaimed as a success, they do not tell the full story.

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Firstly, statutory minimum contributions are low right now, with employees only having to put 1 per cent of the qualifying earnings into their pension until the thresholds increase consecutively in October 2017 and October 2018.

This is when the real challenge of auto-enrolment begins. Minimum contributions for most will increase to 8 per cent, with 5 per cent coming from the member.

Even this is considered by many too low to make the required material difference to pension saving rates, but that is another story.

Laith Khalaf, head of corporate research at Hargreaves Lansdown, told me he believes many more people may stop paying into their pension when this happens. Interestingly, however, he said opt-out rates will not capture this.

It is highly likely that many more people will be paying into their pension by then as almost all employers will have already been staged. Mr Khalaf explained that those who have not opted out initially but decide to stop paying in are not counted as ‘opt-outs’, but rather ‘non-active’ members.

Thus the more important figure will be the amount of ‘active’ members, those who are actually actively paying into a pension. According to the Office of National Statistics, this number has been in free-fall.

Last week, ONS’s Occupational pensions schemes survey 2012 revealed that while total membership of occupational pensions schemes increased by 400,000 to 27.6m in 2012, members contributing has fallen to a new low since records began for all three types of occupational schemes.

The survey revealed that in 2012 there were 7.8m active members in occupational pension schemes, compared to 8.2m in 2011 and 12.2m in 1967. Data gathering for all three types of scheme, including public sector and private sector schemes, began in 1983 and at that point there were 11.1m active members.

This trend must be reversed. Auto-enrolment is certainly succeeding in getting more people signed up and saving, but at an initially glacial rate. If the government does not act to prevent the continued diminution of saving over time, especially as the contributions squeeze begins in five years’ time, then irrespective of low opt-out rates the reform will be a failure.

Given also that the government simply will not be able to afford to pay state pension to all indefinitely without pushing up the retirement age further over time, there is a strong argument to make saving into a pension mandatory.