Inertia drives success, but no room for complacency

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.”

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.

“People are staying in because it is becoming ‘normal’ as their mates are. Other than that, people are staying in as there is that little quiet voice inside them that says ‘I wouldn’t have done this on my own but now that I’ve been put in maybe I just won’t opt out’.”

Mr Jones says that if the economy is going well and people are getting pay rises the jump to 8 per cent will be less painful for employees and maybe by that point, perspectives will have changed and they will be thinking, “I am putting in more but my employer is putting in more as well”.

He adds: “It feels like we are as well placed as we can be for that, but this is new ground and we will have to see how people feel as the reality of gross 2 per cent becomes gross 8 per cent kicks in.”

Demographics and opt-outs

GenLife’s Mr Ayton believes that demographics have a part to play in opt-out rates - in short, that rates only count those that are ‘eligible’ and are artifically low.

Those that earn between £5,824 and £10,000 (inclusive) are not auto-enrolled but have the right to opt-in (many don’t). The employer would have to contribute to the scheme in the same way as for all employees.

While those that earn less than £5,824 can opt to join a pension scheme, the employer is not required to contribute. Auto-enrolment similarly does not apply to those that are self-employed, who can join a scheme that will have them but are not ‘nudged’.

Mr Ayton comments that in the past he has heard statements made about industry opt-out rates of 9 per cent, which he found strange.

“Our own opt-out rates barely reach 1-2 per cent, but once again it comes down to the demographic of the workforce. A large proportion of our members tend to be lower paid workers, with limited income barely reaching the £10,000 eligibility criteria.”

He added that part-time workers with multiple jobs that earn £19,000 per annum are missing out, along with the self-employed market.

Nest currently has close to 1,000 self-employed people amongst its membership. Mr Jones states that while it would be “clearly technically possible” to auto-enrol the self-employed, it is questionable whether a politician would dare to say, ‘I am going to force you to spend your own income on this but the good news is you can opt out’.

Genlife’s Mr Ayton pointed out that in the current auto-enrolment system there is a “separation” between the party under obligation (employer) and those being enrolled and saving (employee).

“For this to truly work for the self-employed, we must be pragmatic as there is not an existing real time compliance procedure such as the PAYE system for auto-enrolment of the self-employed to link to.

“This is important, as such an arrangement requires infrastructure in order to facilitate the regular payment of contributions on behalf of these individuals.”

Policy review

The Association of Consulting Actuaries believes a policy review is needed after the upcoming general election, rather than waiting for the scheduled review in 2017. It cites three principal reasons.

David Fairs, ACA chairman, notes that the review would assess whether some enhancements are needed so employers and employees can meet the sharp cost of increases in minimum pension contributions from October 2017.

Adopting ‘auto-escalation’ is another policy change that ACA is calling for at a review. The policy plan would encourage people to commit to increasing their pension contributions at a future date, often in line with wage increases.

The idea is backed by the pensions minister and is one that the Department for Work and Pensions has said is worthy of further examination as, much like auto-enrolment, it plays on people’s inertia. It also follows a Lord Hutton report suggesting contributions of 15 per cent would be needed to provide effective income for most.

Mr Fairs states: “A clear economic pre-condition is, however, that earnings are generally increasing year by year. It may be that the UK economy has entered a phase where year on year wage increases will begin to re-emerge enabling auto-escalation to take hold.

“Realistically, the expectation must be that auto-escalation will be taken up by employers of some size and hence probably only the larger employers in the smaller firms sector will be prepared to move in this direction.”

donia.o’loughlin@ft.com