People will not opt out of auto-enrolment because they can't afford the higher rates, the chief executive of The Pension Advisory Service (Tpas) has said.
Michelle Cracknell (pictured) told MPs at a Treasury select committee hearing yesterday (13 February) that Tpas was getting a number of calls about auto-enrolment but rarely about affordability, so she did not think looming minimum contribution rises should make a difference to people's behaviour.
From April this year contribution rates will increase from the current 3 per cent to a minimum of 5 per cent (2 per cent from the employer) and to a minimum of 8 per cent (3 per cent from the employer) in the year after.
Ms Cracknell said: "From the insight we have affordability is hardly ever cited as the reason for opting out.
"Introducing it in April is at a time when there is a lot going on on your payslip and there are a lot of changes and therefore I don't think we'll have any evidence then of huge amounts of opt outs. We'll have to watch some way down the line."
Latest statistics published by The Pensions Regulator (TPR) showed between July 2012 and February this year 1.1 million employers enrolled their staff into auto-enrolment, amounting to 9.4 million workers being enrolled.
The opt-out rate, capturing those deciding they did not want to save into the employer's workplace pension, stood at about 9 per cent across employers in 2017, with smaller employers seeing slightly higher rates, according to a government report published in December 2017.
However, the cessation rate, where people just stop making contributions or left the scheme after the one-month opt-out period, is believed to be closer to 16 per cent with larger employers reporting close to 23 per cent, however two-thirds of these concerned were job leavers.
About four in 10 (41 per cent) of employers told the government the majority of employees who had ceased to put cash into their pension had done so between one to three months after automatic enrolment.
Ms Cracknell thought people across all income levels struggled to understand how much they needed in their pot to achieve their desired retirement income.
But while the guidance body chief executive thought 8 per cent contributions would not work for the better paid, she believed it could work as a level for the lower paid, therefore the government should not be tempted to make further increases too soon down the line.
She said: "While for a number of people in Middle England 8 per cent wouldn't be enough and they should be looking more at double that level of contribution if it is set there to make sure that the lower paid have sufficient income in retirement it is a very good number to start with."
Rather than affordability, most calls Tpas receives are based on misunderstandings as well as people affronted by deductions made from their salary without their permission, Ms Cracknell said.
In particular, people were confused about the fact you can have concurrent pensions.
They also did not realise the value of having small pension pots post pension freedoms, for instance when people are in jobs for only a short period of time.
Ms Cracknell said: "The evidence of what people think is happening with their pensions in based on evidence from 15 years ago. Most of the knowledge people have is out of date and therefore they are making incorrect decisions."
carmen.reichman@ft.com
