From the government’s perspective, pension auto-enrolment has been a huge success. In 2012, before the scheme began, only 44% of private sector employees had a workplace pension. That is now 81%. The government wants us all to save more for our retirement as the state pension is costly – out of around £850bn a year of total spending the state pension costs £100bn (and that will increase as the population ages).
REED surveyed finance professionals on the topic for their monthly Big Question research. Surya Deva, Senior Manager, SCB said ‘Personally, it feels the contribution is a good thing and makes people plan for their future more.’
But what about from the perspective of business? Has auto-enrolment been a good thing? Richard Finch, Group Regulatory Reporting, HSBC says so: ‘I think it’s good to plan for the future and think it is a good idea for companies to contribute.’
But so far the minimum legal contribution rates have been relatively low. For businesses, once a firm had to start paying in (from October 2012 for large employers and from Jan 2016 for small ones) the minimum rate was just 1% of salary for the roll out years and then 2% last year. That’s not added much to the wage bill.
And in fact 53% of companies surveyed in the Big Question said they had contributed more than this minimum. And that is no surprise. A pension is part of the overall package of benefits used to attract and retain employees – vital in a jobs market that has extremely low levels of unemployment. As Jess Dollimore, Head of Finance, Van Hag confirms ‘It is becoming harder to recruit and we are considering upping the pension contribution to be more competitive.’
However the big test for auto-enrolment has just begun. Since April the minimum contribution rates have increased again to 3% of salary for employers and 5% for employees. For businesses a rise from 1% of salary to 3% of salary is a tripling of cost. Added to the increase in minimum wage almost 60% of businesses surveyed agreed that the rising costs of employment are making it more difficult to run a business. As Bruce Santo says ‘run a small business and so I will notice it (the increase).’
And the increase to the minimum contribution rate comes at exactly the time when wage growth is accelerating. For the first time since the financial crisis began over a decade ago, wage growth has been above 3% for six consecutive months. For businesses the cost of labour is rising.
Wage growth though may help workers absorb the large increase in their pension contribution from 1% of salary (for the year to April 2018) to 5% (for the financial year just beginning). Although the view from those surveyed is that increasing numbers of employees will opt out of auto enrolment because of the mandatory increased contribution rate. Almost 40% of businesses questioned said they expect to see up to 25% of employees decide they can no longer afford the minimum pension payment and pull out. Rhys Phillips, Associate, BLM: ‘I think a greater number of people will be less likely to invest in pension schemes now.’
Also it is worth bearing in mind that the employee contribution increase from 1% to 2% of salary a year ago did not lead to significantly higher numbers of workers opting out. And opt out rates have been lower than initial estimates. Before auto enrolment there had been estimates that opt out rates could be as high as 28%. In fact they are on average only 9% so far.
And maybe that is not a surprise either as consumers can exhibit passivity – failing to change bank accounts, failing to change their energy supplier etc. Maybe many don’t have the time or inclination to make an informed decision about auto-enrolment.
In fact according to a recent survey from the pensions specialist advice specialist, Portafina, almost half of all Brits said they didn’t know how auto enrolment worked and over a third are unaware of how much they pay into their pension each month.
Inertia and a lack of knowledge may be a good thing as far as the government is concerned as it keeps Britons saving for their retirement even if they are feeling financially squeezed at month end.
For employers this squeeze on household finances may prompt many to ask for a pay rise – placing financial pressure on employers. As another respondent commented, ‘The rise in mandatory contribution (for employees) without a salary increase, will be challenging’.