Auto-enrolment  

Master trusts call for opt-down option with AE rate increase

Master trusts call for opt-down option with AE rate increase

Pension specialists are calling for the government to introduce an opt-down option when increasing the auto-enrolment minimum rate to prevent "over-saving".

The suggestion was made by spokespersons from Smart Pension and Nest today at a hearing in Parliament with the Work and Pensions committee, which is now in its third stage inquiry into pension freedoms and saving for later life.

Darren Philp, director of policy and market engagement at Smart Pension, told MPs that while there was broad consensus that the minimum auto-enrolment rate should be increase from its current 8 per cent, this move spurred a debate about over-saving.

He said: “What I would like to see in the future is consideration not just over increasing contributions to 12 per cent, but also allowing people to opt down.”

He explained that those for whom 12 per cent of minimum contributions “might be too much, it’s not an all or nothing [decision],” as they could be able to opt down to current levels.

“By considering things like that, we can change default behaviour and build on the success of auto-enrolment, but we are making easier to people to make sure they can afford to stay in, which I think is really important,” he noted.

Will Sandbrook, managing director for strategy, analytics and Nest Insight at Nest, warned against focusing too much on medium earners.

“I do think that it is really important that we also consider the people that are not medium earners, [for] whom in some cases … 12 per cent is quite likely to be too much.

“As we think how to build on auto-enrolment, making sure that we do that in a way that is going to work for people in different level or earnings is really important.”

Sandbrook noted that the current system was “very binary”.

“If you don’t want to save 5 per cent, you give up the right to an employer contribution at all. And for that reason, some level of capacity to opt down if default rates are going to go up might well be advantageous.”

But he recognised there were significant operational issues in implementing such a system, which were highlighted by Philip Brown, director of policy at B&CE, the provider of The People’s Pension.

Brown told the committee there were “serious design considerations” required to introduce an opt-down option

“If you allow a step-down in contributions, which for some will be appropriate, you need to work out if that step down is [being made by] the individual, the individual and the employer, and how it works at a practical level.”

He also noted that attention should be paid to considering a mechanism to allow savers to “step back up when they feel is appropriate to do so”.

“There’s quite a bit of work in the intricacies of a step-down process,” he stressed.

Philp noted that re-enrolment, which happens every three years if a member opt-out of saving into a pension scheme, could be used to that effect.