AE rates hike has minimal impact on savers

AE rates hike has minimal impact on savers

The three biggest master trusts in the market saw an increase of a mere 0.2 percentage points in the number of people that stopped saving into their workplace pension scheme after April’s minimum contribution hike.

According to new data, the government scheme Nest, Now: Pensions and The People’s Pension had an average cessation rate of 3.5 per cent between April and June, which compares with 3.2 in the previous three months.

Auto-enrolment minimum pension contributions increased in April, from 2 per cent to 5 per cent. In 2019 they will increase again to 8 per cent, with the employee paying 5 per cent.

The cessation data – which was analysed in this research by the Pensions and Lifetime Savings Association (PLSA) - is different from opting-out, however.

Opting out includes a six-week window when a member is first auto-enrolled in the scheme and has the choice to leave and get all his contributions back, which is monitored by The Pensions Regulator.

Until now, the only data regarding cessation rates – when members stop saving into their scheme – was given by the government in its auto-enrolment review in December, when it revealed 16 per cent of savers had ceased making contributions.

Data published last week by TPR reflected a similar trend to today's, as more than 90 per cent of small and medium sized employers said none of their staff had asked to leave the pension scheme when contributions increased.

Cessation rates also capture individuals who stopped saving either because they changed jobs or because their employer switched pension provider, the PLSA noted.

All this suggests the impact of higher contributions on savers’ behaviour has been smaller than anticipated, the trade body said.

Opt-out rates have also remained steady since April, with the average rate for the three master trusts between April and June standing at 6.2 per cent, the PLSA added.

Nigel Peaple, director of policy & research at the PLSA, said auto-enrolment had been the "most successful" pensions reform in a generation, resulting in "millions more people saving for retirement".

He said: "It was designed with contributions rising gradually over time to ensure people could afford the payments, and so it’s extremely encouraging people are continuing to save after the first increase. In this case, doing nothing really does pay.

"This year’s increase could mean someone on average earnings ends up with a pension pot of £80,000 instead of £32,000.

"With small numbers making such a big difference, and many people saving for the first time, it’s vital industry and government continue to work together to sustain savers’ confidence in pensions and help people achieve the retirement they want."

For Esther McVey, Secretary for State for Work and Pensions, these numbers show that auto-enrolment is "working and transforming retirement for millions of people".

She added: "The proportion opting out or ceasing saving remains low as contribution rates increase, helping people save markedly more for their retirement."

Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, said the research results were "really good news".