Is the UK ready for auto-escalation?

Is the UK ready for auto-escalation?

While auto-enrolment is currently being implemented across all the UK businesses, low levels of contribution continue to remain a concern for the government. Minimum rates currently stand at 2 per cent but are expected to rise to 8 per cent (3 per cent from employee and 5 per cent from employer) by October 2018. However, increasing levels of minimum contribution could also mean employees opting out of workplace pension schemes.

In order to deal with low contribution rates, a number of analysts have suggested adopting auto-escalation, a scheme that allows employers to increase member contributions annually by a set increment, most commonly 1 per cent.

As mentioned in Money Management’s July issue, the scheme aims to increase the amount you contribute to your pensions every year. Quite popular in the US, the scheme lets savers start with a 5 per cent contribution to a 401(k) plan, the retirement savings plan in the US, and then add a 1 per cent increase every year up to a maximum of 5 per cent.

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A research conducted by Putnam Investments in the US in 2014, showed that while the use of auto-enrolment is rising among US 401(k) plans, the adoption of auto-escalation has been slower, even though plan participants indicate they would like to use it.

Statistics from Putnam indicate that the average age of those who are likely to choose auto-escalation is 40.3, and 40 per cent of those who choose the feature are middle-income households earning $50,000 to $100,000 per year.

While the concept of auto-escalation seems to be catching on in the US, implementing something similar in the UK could be a big task according to Tom Nall, workplace solutions director at SimplyBiz. “For businesses auto-escalation may mean simply greater constraints on their reward budget, challenges to engage staff given that the changes are mandatory, and the increased potential for salary exchange to add value/reduce cost to their pension arrangements.”

The UK is undergoing a lot of change in the pensions landscape, with the introduction of auto-enrolment and retirement freedoms. One more administrative hurdle such as auto-escalation could leave advisers and the public confused.