Personal Pension  

Inertia drives success, but no room for complacency

This article is part of
Future of Auto-Enrolment - April 2015

The primary goal of auto-enrolment was to get people saving more for their retirement.

It has been well-documented that people just were not saving enough and while auto-enrolment is not mandatory, it appears that inertia has driven people into saving more than they would have otherwise.

Arnold Ayton, platforms and partnership manager at GenLife, says: “It works because people have historically failed to take an interest in saving for their retirement, despite often having their best intentions to do so.”

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Mandatory opt-in assistance

One of the main drivers of auto-enrolment’s success is that, while it is not mandatory for an employee to contribute to a pension, it is mandatory for their employer to opt them in to a pension scheme if they are eligible.

The criteria for being auto-enrolled is to earn over £10,000 a year and be aged between 22 and state pension age. People can opt-out but they only have a limited timeframe and, quite frankly, most people are too lazy to actively do so.

Mr Ayton explains that this lack of interest, coupled with an underlying sense of knowing they need to save but never taking the proactive decision to do so, means once people are in they tend to stay in.

Tim Jones, chief executive of the National Employment Savings Trust, describes take-up as “very strong”, stating it has exceeded most commentators’ expectations on opt-out levels.

He highlighted that prior to auto-enrolment, industry commentators were quoting opt-out rates of around 25-30 per cent, but so far opt-outs have not even been half this. “It’s 8 per cent for Nest and for the industry it appears to be 10 per cent. That is an amazing result.

However, he warns against ‘complacency’. “Contributions are 1 per cent plus 1 per cent and none of us know what will happen when we go through the phasing up to gross 8 per cent [of which 5 per cent will be from salary] by 2018. But you’ve got to say so far so good.”

Culture change

To ease the burden on employers, auto-enrolment is being introduced in stages up until 2017, beginning with the largest companies and ending with the smallest.

Contribution rates are currently only gross 2 per cent – 1 per cent from the employee and 1 per cent from the employer – but from 1 October 2018, employers will have to put in a minimum contribution of 3 per cent with gross contributions totalling 8 per cent.

As the smallest employers are yet to enrol, there are suggestions that opt-out rates are artificially low and will increase once smaller firms get involved and contributions are subsequently racheted up.

Nest’s Mr Jones says that while he has heard this before, he does not know if it actually will affect opt-outs. “What I do know is over 5m people are in and that means that there are a lot of people who know a lot of people who are in.