The success of automatic enrolment is tempered to an extent by the fact that a large proportion of those employers and employees who are new to pension saving are opting to pay the minimum contributions possible.
While the automatic enrolment review will consider the adequacy of automatic enrolment contributions levels there remains a question mark over whether increases in contributions due in 2018 and 2019 will increase opt out rates. A recent survey conducted for Aviva revealed that only 4% of members say they will definitely opt out, but rkrryingly only 50% will definitely stay in. We all know that inertia will impact these figures but how much is a bit of a guess.
Employers may be opting to pay the minimum for a number of reasons. It may reflect economic challenges now magnified by Brexit uncertainty, a change in the nature of employment or a lack of value placed on pension saving by employees. Employees though seem to be paying what they are asked to pay, and if that is 1% the majority are paying 1%. The government appears to have created a powerful nudge that automatic enrolment minimum contributions are the right contributions.
Of course many employers offer higher contribution rates and it’s common for an employer matching structure to be implemented. This rewards employee engagement with a higher contribution, in theory it directs employer expenditure toward those employees who might value it the most.
Matching can be a powerful nudge to improve employee contribution rates where it is effectively communicated, with evidence that almost 2/3 of members will gravitate to the contribution level that provides the maximum employer match.
But what can be done where there is no employer contribution nudge in the right direction? How can we convert spenders into savers for later life? Initiatives such as Save More Tomorrow are probable long term solutions, turning good intentions into affirmative actions.
Simply reminding people that they can pay in single contributions could pay dividends. High earners can ensure they take advantage of the maximum government contribution to their pension scheme while it remains at current levels, and bonus sacrifice offers even greater attractions through the NICS savings for both employers and employees.
But what else can cash strapped employers do to improve outcomes for members? Many employers and their advisers will have negotiated attractive terms for their workplace pension scheme but they and their employees might not be getting full value from that investment.
A simple communication around the value of low charges can pay real dividends for employers and employees. Stakeholder charges were once revolutionary but now seem anachronistic in a post charge cap world. A transfer has the potential to improve employee pension pots significantly at little or no cost to the employer. An additional charge of 0.5% reduces the value of a 40 year olds £50,000 pension pot by nearly £7500 if they retire at their new state retirement age. £7500 seems a healthy return for the time it takes to assess if a transfer from a stakeholder friendly scheme makes sense or not.
For employers, the advantage, in addition to the warm feeling that comes from doing the best for your employees, is that employees with bigger funds tend to be more engaged with pension saving and value their company pension scheme more.
Long term we need to increase pension contributions and employers will undoubtedly have a significant role to play in nudging employees in the right direction. But in the short term employers could do worse than making sure their employees appreciate the benefits that low charges can bring and how they can maximise the positive impact on the pension savings they have already built up.
Dale Critchley, Policy Manager, Workplace Benefits
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