Concerns that the April 2018 increase in minimum pension contributions will lead to large-scale opt-outs are unfounded, according to new analysis published today from mutual insurer Royal London.
The first phase of automatic enrolment has been a huge success. Over one million employers have automatically enrolled around nine million workers into a workplace pension, and around 90% of workers have chosen to remain in a pension. Staying in rates have been far higher than the 67% originally expected by the Government.
In April 2018, the mandatory contribution rates rise to a combined 5% (with a minimum 2% from the employer) and in April 2019 to a combined 8% (with a minimum 3% from the employer). It is estimated that between 6 to 7 million workers who are currently paying at the legal minimum level will be asked to contribute over £2 billion pounds extra between themselves and their employer, prompting speculation that cash-strapped workers might opt out in large numbers.
However, a new policy paper by Royal London ‘Will Britain take the next pension contribution increase in its stride?’ argues that the April 2018 and April 2019 will not create a rush to opt out of workplace pensions.
The paper argues that a number of factors will combine to keep pension scheme membership at a high level:
- The national living wage, which covers more than 1.5 million of the lowest-paid workers in Britain will be increased by 4.4% in April 2018. As a result, the lowest paid workers, who might be thought to be most likely to opt out when contribution rates rise, will be guaranteed an increase in take-home pay *even allowing for the rise in pension contributions*.
- Income tax thresholds and National Insurance thresholds are increased in April of each year. Although this is only to keep pace with inflation, such increases will reduce the number of people who suffer a fall in take-home pay in April following the contribution rises. It seems reasonable to assume that an absolute pay cut would be far more likely to stimulate an opt-out than a nominal increase in take-home pay that is simply ‘lower than expected’.
- Millions of people get an annual pay rise in April. Pension contributions for workers will rise by 2% (or 1.6% after tax relief), so even annual pay rises at the current average level of around 2.4% would more than offset the increase in pension contributions, especially where workers are only contributing over a band of ‘qualifying earnings’.
Steve Webb, Director of Policy, Royal London said:
"The power of inertia remains strong – individuals will still have to actively opt out and the additional amounts they are being asked to contribute are still relatively modest, especially for the lowest paid workers who will be receiving a large increase through the national living wage. Evidence from the US suggests that when contributions into workplace pension schemes were gradually increased by a few percentage points from low single digit rates, opt-out rates were very low, and the same is likely to happen in the UK.
We believe that relatively modest increases in contributions, combined with pay rises, especially for the low-paid, are unlikely to fatally undermine the success of automatic enrolment. The real focus should already be on how to get savers beyond the 8% minimum level that they will reach in 2019 and up to more realistic levels."
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Notes to editors
‘Will Britain take the next pension contribution increase in its stride?’ is available to download from www.royallondon.com/media/policy-papers
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.