As many as 70 per cent of employees will be saving into a workplace pension by the end of 2018, according to analysis by Moody’s, adding that once auto-enrolment is fully established there will be an additional £7.4bn of new pensionable assets per year.
Working from the Office of National Statistics’ annual survey on pension trends, the rating agency suggested that the average employee now covered under an auto-enrolment scheme likely earns less than the average UK weekly wage of £483, because more affluent employees are more likely to already be members of an occupational pension scheme.
However, using the £483 figure, new auto-enrolment savers added approximately £2bn of pension assets last year.
All this was deemed positive for the life and pensions sector, with top-line growth in benefits for insurers that already possess a large market share in defined contribution and personal pension schemes.
It stated that such groups include Standard Life, Legal & General, Scottish Equitable, Aviva and Scottish Widows.
Last month, Standard Life reported UK operating profit before tax up by 6 per cent to £350m last year, with overall retail and corporate fee-based business assets under administration of over £100bn.
Paul Matthews, the insurer’s chief executive for UK and Europe, stated that auto-enrolment brought in 1,334 new schemes on the corporate side, upping net inflows by 10 per cent to £2.2bn.
David Masters, a senior analyst at Moody’s, noted that auto-enrolment products also have lower margins than other products these providers sell, in part because of a government charge cap, and the profitability of auto-enrolment schemes for insurers is low.
“Furthermore, the government-administered National Employment Savings Trust scheme is a low-cost competitor with insurers’ product offering in this arena, particularly among employers with relatively few employees.
“In March 2014, the UK government announced that auto-enrolment pension fund annual management fees would be capped at 0.75 per cent of assets. We also think it likely that this cap will decline over time, further negatively pressuring the profitability of auto-enrolment schemes in future.”
He added: “Although we expect these profitability pressures to continue, we consider auto-enrolment schemes a scale play and thus increased asset flows onto insurers’ balance sheets are credit positive.”
Earlier in the auto-enrolment roll-out Allison Fower, head of wealth management at consultancy Logica, said that initially providers were “rubbing their hands with glee” due to potential new business, but in reality they will be increasing volumes but “not necessarily making the value”.
Employees who do not opt out of auto-enrolment are currently only required to contribute a minimum of 1 per cent (including tax relief) of their eligible earnings into the scheme, increasing to 4 per cent by October 2018.
Moody’s suggested that this will result in higher opt-out rates, which may limit asset flows onto insurers’ balance sheets over time. To date, opt-out rates among eligible employees have been around 10 per cent.
peter.walker@ft.com
