IFS – AE doubles membership of non-eligible employees – but millions paying in less than 2pc

screen-shot-2016-11-17-at-11-19-44Automatic enrolment has more than doubled membership of workplace pensions among those not directly targeted by the policy and achieved take-up by 88 per cent of those who are, according to research by the IFS.

But the number of workers receiving 0-2 per cent of earnings going into their workplace pension has increased by 24 per cent. The IFS has not separated out the percentage of newly automatically enrolled who are contributing less than 2 per cent – this figure represents the proportion of all workers paying into schemes. A further 8 per cent of all workers are contributing an extra 2 to 5 per cent since the rollout of AE, while 5 per cent are paying between 5 and 10 per cent more, and 2 per cent paying more than 10 per cent.

Automatic enrolment increased pension membership rates across those not eligible – employees aged under 22, employees over the state pension age, those earning less than £10,000 per year, and those who just joined their employer – by 18 percentage points, from a baseline level of 15 per cent prior to the reform. The increase was particularly pronounced among those earning under £10,000 per year, where there was a 28 per cent increase from a baseline of 18 per cent.

The study shows that, while some employees are choosing to opt out, coverage of workplace pensions had been increased by a substantial 37 percentage points by April 2015. This effect is larger among groups – younger employees, lower-earning employees and lower-tenure employees – where pension membership was less common prior to the reform being implemented.
AE has also increased the numbers of employees placing more than the current minimum amount into a workplace pension. The proportion placing 5 per cent or more of their total earnings into a workplace pension has increased by 7 percentage points.

The report found AE increased pension saving by £2.5 billion per year by April 2015.

The report says that while most of those brought into workplace pensions are, for now, making relatively low contributions, the proportion of employees with a total contribution rate of at least 5 per cent of earnings has increased as a result of automatic enrolment. This does not absolutely rule out any ‘levelling down’ says the IFS, but it does mean that if it is happening it is being more than offset by some employers choosing to enrol their employees at contribution rates that, in some cases, are in excess of the 3 per cent of ‘qualifying earnings’ minimum that will be expected from all employers from April 2019.”

IFS senior research economist and report co-author Jonathan Cribb says: “Automatic enrolment has been very successful in boosting membership of workplace pensions. This has been particularly true of younger employees aged 22 to 29 and relatively low earners on between £10,000 and £16,000 per year. Significant numbers of those not directly targeted by the policy have also been brought into workplace pensions, such as those earning less than £10,000. The story of automatic enrolment is certainly a case of so far so good. A key issue is whether those brought into workplace pensions at low contribution rates will remain in when minimum contribution rates start rising.”

Tisa policy strategy director Adrian Boulding says: “Whilst the research has found some evidence of increased membership in groups of employees not included in the statutory requirement for auto-enrolment, TISA remains concerned that 6 million people have been assessed by their employer but rejected for auto-enrolment because they earn under £10,000 pa or are too old or too young. The experience of our members is that where low earners are getting pension contributions it is because their employer has decided to enroll all staff for the sake of simplicity and not because the individuals have exercised their right to ask to join.

“The very large proportion of employees that IFS find are receiving contributions of 2 per cent or less of their earnings is deeply troubling. In some cases that’s because the employer’s scheme only provides the statutory minimum of 2 per cent of earnings between £5824 and £43000 pa. But it’s very worrying that IFS find that even where higher levels of contributions are available, many employees are sticking on the bottom rung to which they were automatically enrolled.

“The current statutory minimum contributions of 2 per cent are low and this IFS research underlines how critically important the phased increases of minimum contributions to 5 per cent in 2018 and 8 per cent in 2019 are to the wellbeing of the next generation of pensioners.”