Dominic Fryer: Approaching AE’s contribution challenge

Next year’s contribution increase will be auto-enrolment’s first new hurdle since the initiative launched five years ago. The industry needs to remind employees and employers why it pays to remain opted in says Aviva head of workplace pensions Dominic Fryer

The launch of auto-enrolment in 2012 is something of a distant memory now. Almost five years on and most large employers now have their workplace pension scheme embedded and the vast majority of employees are signed up and making contributions towards their retirement.

Despite the slight doomsday feeling at the time, the predictions of mass opt outs and resistance from employers hasn’t really surfaced. The proportion of people choosing not to be part of their workplace pension has stayed at around a steady 10 per cent and most businesses have taken AE in their stride.

It shouldn’t be overlooked that 2017 is of course a huge year for AE, simply in terms of the number of employers staging. Upwards of 500,000 businesses are due to set up their workplace pension this year, the majority of them in the SME market where typically resources for this kind of administrative task can be rather thin.

But in 12 months time we are going to see the first major hurdle for AE since its launch. In April 2018 employer and employee contributions are going to rise for the first time. The current total minimum contribution is set at 2 per cent of qualifying earnings, typically with 1 per cent coming from the employer and 1 per cent from the employee. But this time next year, employers will be asked to contribute a minimum of 2 per cent and employees 3 per cent.

From a pension provider perspective, a total contribution of 5 per cent is still low – our auto-enrolment pre-review recommended that total contributions need to rise to 12.5 per cent for most people to have a chance of decent retirement. Nonetheless, a doubling of employer contributions and a tripling of contributions for employees is clearly going to have an impact.

There are genuine fears that this rise could trigger an increase in employee opt outs. Currently an employee earning £27k and making 1 per cent contributions on qualifying earnings is only paying in around £18 a month. Next April that will rise to over £50. That’s not an insignificant chunk of cash to have taken away each month and some people may think twice about whether a pension is a best use of their money.

This is where employers, providers and advisers must step in. The quality of the communication to employees over the next few months will have a major impact on the decisions that are made in a year’s time.

There are a number of topics that can be highlighted to employees to make them aware of why they should very carefully consider their next move in regards to their workplace pension.

They should be reminded of how much they have saved so far. Encouraging people to sign into the platform where their pension details are kept will help them get a view of what they have saved so far. It may also be worth telling employees to keep an eye out for their annual statement that could drop through their door soon. Having sight of how much they have built up already may be the encouragement they need to keep going.

Remind them about the ‘free money’ they can get. While their contributions are going up, so are the employers. By sticking with the higher contributions, they’ll get more from their employer in return. Tax relief should also be on their radar as well. It is a notoriously tricky concept to comprehend – one of the reasons we think it should be rebranded to ‘saver’s bonus’. People should be aware that they more they save, the more the government will give them.

We also need to encourage employees to use modelling tools and simple rules of thumb to understand what their retirement might be like. There are a variety of tools available online that will demonstrate the impact of different levels of saving. Some don’t just concentrate on monetary outcomes, but instead focus on the kind of life people want to have before informing them of what level of saving they would need to achieve it. Rules of thumb can also be useful, such as starting to save 40 years before a target retirement age and saving a total of 10 times your annual salary.

These are all clearly employee focused strategies. They are important because they have the power to opt out, whereas employers do not. But that’s not to say that businesses should lose focus on the positive effects of increased contribution levels.

A workplace pension is an attractive benefit that can be used to retain and recruit good quality people. Talking to employees about the contribution they are getting from their employer can create a sense of being valued that can energise a workplace and help with productivity. A workplace pension is a large financial investment, especially for a business with employer numbers into the hundreds or thousands. A return on investment (ROI) is key, but can be hard to measure. Creating a buzz around the pension scheme and a positive feeling around increased contributions could lead to a reduction, or a least no significant increase in the number of people opting out. That is an ROI that is much more tangible.

With the government review on AE coming in the autumn, workplace pensions will have a heightened profile, in the media and among employees. We must capitalise on that to show why saving a bit more today will provide a more comfortable tomorrow.