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What success auto enrolment? Aegon’s Kate Smith on the DWP’s assessment

1 January 2019

Kate Smith, head of Pensions at Aegon, examines the DWP’s report on the success of auto-enrolment with employees and employers

The Automatic Enrolment evaluation report published by the Department for Work and Pensions shows that overall auto-enrolment has been a success with millions more now enrolled into a workplace pension.

Looking at the numbers, it’s positive to see that the number of eligible employees who are now saving into a workplace pension has increased dramatically as has the annual amount being saved. This is set to continue as the minimum contributions rise for the second time next April.

Across the private sector in particular, contribution rates are up and it’s encouraging to see the level of contributions being made by some employers, with 24% paying in more than 3%. Equally positive is the relatively low number of employers who are levelling down with the report highlighting that where employers have experienced increased contribution costs as a result of auto-enrolment, only 1% of employers have adopted levelling down as a strategy to absorb increased contribution costs, far less than expected.

While opt-out rates remain consistent overall, there’s evidence that behavioural economics is working. Employees are getting used to the idea that each job comes with a pension, and that normally this means paying pension contributions. This is clearly demonstrated by lower opt-out rates for new recruits compared to when employers ‘staged’. Surprisingly, higher earners tend to have a higher opt-out rate than lower earners, this is a worrying trend, unless they have other assets and savings, as they are the ones who won’t be able to fall back on the State.

The not so good news is that participation rates are down from a peak at 79% in 2015 to 73% in 2017, although this may be due to the way the data has been collected. We’re beginning to see trends emerging, including across gender and age brackets with women overall having higher participation rates than men. While pension participation remains highest for older employees, it’s good to see that the largest increase has been amongst the youngest in the workforce, those aged 22 to 29.

The report shows that businesses have responded well to auto-enrolment and while the figures speak for themselves in revealing the scale of success, it’s reassuring that around two-thirds of employers found their ongoing duties in relation to auto-enrolment less onerous and burdensome than expected.

The 2018  increase in auto-enrolment contribution had little impact on the opt-out rate, partly because many employees were already paying above the minimum. The situation may be very different when contributions go up again in April 2019, with 6.1 million employees needing to increase their contributions to 5% of a band of earnings. Even with the incentive of the employer 3% contribution and tax relief on their own contribution, this could be a massive challenge.

Despite this the harsh reality is that for most people auto-enrolment contributions aren’t going to be enough, and generally, people should be saving double this amount.