Million opt-outs predicted as AE faces pivotal two years

A million eligible workers will have opted out of auto-enrolment pension schemes by 2019, joining 12 million self-employed and non-eligible workers, according to research from Hargreaves Lansdown.

Auto-enrolmentThe calculation is based on Government assumptions that opt-out rates will leap from 10 per cent today to 21.7 per cent in 2018 and 27.5 per cent in 2019.

The firm says the behaviour of workers over next two years, when someone on average earnings will see the £18 they currently spend on pensions each month jump by £74 to £92 – will be pivotal to the future of the nation’s long-term savings policy.

Hargreaves Lansdown has set out five proposals for mitigating non-inclusion in pension saving, including timing the increase in the personal allowance from £11,500 to £12,500 to coincide with the contribution rises in April 2018 and 2019 to will help offset the reduction in take home pay.

Other proposals include improving financial literacy, taking a wait-and-see approach to further contribution increases, compulsion and auto-enrolment for the self-employed.

Hargreaves Lansdown senior pension analyst Nathan Long says: “The shape of future long term savings policy hinges on the behaviour of workers during in 2018 and 2019.

“Repairing the retirement savings of UK workers requires more than a quick fix. Auto-enrolment has so far boosted numbers saving, but two huge obstacles are looming in the form of contribution hikes in 2018 and 2019.

“The Government workings point to soaring opt-out rates, although their models include assumptions formulated 8 years ago. It is important these models reflect the DWPs current expectations, if not they should be mothballed. Out of date assumptions undermine any work in which they have been used. We know this includes calculations to assess the impact of fine tuning the auto-enrolment rules, but suspect they may also have been used in the review of pension tax relief. Underestimating the number of opt-outs would result in more money going into pensions and the Government spending more on tax relief, the bill for which the Treasury would be forced to find from somewhere.

“Furthermore, plenty of employers would welcome a steer as to future opt-out rates in order to better understand the potential cost increases to their business.”