Auto-enrolment scheme members will be able to lower their pension contribution when minimum rates go up, due to a little known loophole in current legislation.
However, this option will only be available in certain schemes, due to their own rules, and members can lose the employer contributions.
Industry voices are divided about this option, however, with some of them asking for it to be banned since it is against government policy, while others believe that what is important is to get people saving, no matter at what rate.
The Pensions Regulator (TPR) guidance for employers on opting-out – a six-week window when a member is first auto-enroled in the scheme and has the choice to leave and get all his contributions back – says that a jobholder can “continue membership at a lower rate”.
However, if a member chooses to “reduce their contributions to below the statutory minimum level, the scheme will no longer be qualifying for them”.
This means the employer is no longer obligated by law to make contributions for that employee’s pension pot.
Employers, however, are not allowed to promote this option to their staff.
Auto-enrolment providers are now getting ready for the increase of minimum pension contributions, which are currently set at 2 per cent – 1 per cent each for employer and employee.
This will increase to 5 per cent in April, with the employee paying 3 per cent.
One year later, it will increase again to 8 per cent, with the worker paying 5 per cent.
A total of £17bn a year will be going into workplace pensions by 2019 to 2020 because of auto-enrolment.
Adrian Boulding, director of policy at provider Now: Pensions, argued that it “would be a very good idea” to remove this option from legislation.
He told FTAdviser: “It’s a weasel provision and has been allowed to sit in there because some people thought that maybe if an employee can't afford the full contribution, it would be better to pay something rather than nothing.
“Actually, auto-enrolment contributions are very very small, and 1 per cent was the starting rate to get people used to being in a pension scheme. If you save at 1 per cent of your earnings throughout your life you will not build up any meaningful pension pot.
“I think it is a little said that this loophole [exists] in the law and that some people may exploit to pay lower contributions.”
According to Hugh Nolan, president of the Society of Pension Professionals (SPP) this option is “a well-kept secret” and not a lot of people will be looking at it.
“I'm not totally opposed to it, because one of the roles of auto-enrolment is keeping people in, at all costs.
“People that are already paying the small amount now, if we can keep them in pension schemes and keep them saving, that is the key. That is better than nothing.”
Mr Nolan argued that there is “a lot of concern about the increase in contributions” in April, and with the number of current members that will leave their schemes.
However, this “is offset by the fact that minimum wages go up in April, a lot of people are getting a pay rise in that month, and personal tax allowances change,” he said.
Darren Philp, director of policy at workplace pension provider The People's Pension, agrees that is better that people opt-down instead of stop savings all together.
He argued that “there are safeguards in place”, and people are subject to re-enrolment every three years, even those who are paying a lower contribution.
There are now more than nine million people auto-enrolled in a workplace pension scheme.
Due to the fact that The People’s Pension offers more products than just auto-enrolment, it will allow opting down if a member asks for it.
Now: Pensions isn't going to be making an opt down available. However, it "will keep this decision under review in the event that we see demand", a spokesperson said.
Salvus Master Trust, on the other hand, doesn’t support opting-down and will not allow this feature to its members, managing director Graham Peacock told FTAdviser.
The government has recognised the existence of the loophole.
A spokesperson at the Department for Work and Pensions (DWP) said: “In some schemes, it may be possible for individuals to ‘opt down’ to a lower contribution rate.
"However, this option isn’t widely available and neither schemes nor employers are permitted to actively promote it. Anyone who does opt down to a lower savings rate will be automatically re-enrolled at the original rate approximately every three years.
“We strongly encourage all employees to plan towards retirement by building up their private pensions savings, which is why minimum automatic enrolment contributions will rise in April this year and in 2019."
According to Paul Gibson, managing director of Granite Financial Planning, “auto-enrolment should be made as flexible as possible to cover scenarios such as employees looking to pay in less”.
maria.espadinha@ft.com
