Government’s assumptions on opt-out rates, unearthed by Hargreaves Lansdown, point to around one million missing out on retirement saving after auto-enrolment is fully rolled out.
- Currently 10% of members opt-out of saving into a workplace pension. The Government is assuming this will leap to 21.7% in 2018 and 27.5% in 2019.
- The assumptions are formulated using current observations as well as data from 2015 and 2009.
- Using these assumptions 1 million eligible employees are estimated to opt-out in 2019; with almost 13 million altogether estimated to be outside of pension saving in 2019, when self-employed and non-eligible workers are included
- Limiting the fall out
- Wider implication
- Estimates used
Nathan Long – Senior Pension Analyst at Hargreaves Lansdown:
‘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 £18 that someone with full-time average earnings is currently required to spend on pensions each month will jump by £74 to £92 come 2019. All of a sudden this is no longer spare change.
Dropping out of saving for even short periods can seriously harm your retirement. Someone with average earnings who only opts out between the ages 22 to 25, could reduce their pension pot by £20,000 when they reach retirement.
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 Out of date assumptions undermine any work in which they have been used.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.
Given the increase in minimum contributions next April, further thought should be given to how to minimise opt-outs. For example the government could look at the timing of increases to the Personal Allowance, as well as focusing on better member communication. An improved understanding of likely opt-out rates would help inform these decisions.’
Limiting the fall out
The Government will be rightly nervous at the prospect of auto-enrolment unravelling before their eyes. A number of measures could lessen the impact of higher contributions.
Improve financial literacy – helping people of all ages better understand their personal finances raises awareness of the importance of long term saving.
Timing of Personal Allowance increases – The Government has committed to raising the personal allowance from £11,500 to £12,500 by 2020. Timing the increases to coincide with the contribution rises in April 2018 and 2019 will help offset the reduction in take home pay.
Wait and see on further contribution rises – There have been calls to further increase the minimum contribution levels under auto-enrolment beyond 8% and to do so quickly. The high level of opt-out assumed by the Government should dampen these calls and shows that the legislation is currently walking a bit of a tightrope.
Compulsion – If large numbers of workers shun pensions, retirement saving could be made compulsory by removing the ability to opt-out. The current Government is likely to have neither the appetite nor the ability to push through such radical reforms.
Self-employed auto-enrolment – Currently only 1 in 10 self-employed workers save for retirement. Including this group in long term saving needs to happen quickly. The soon to be published review by the RSA’s Matthew Taylor may be the catalyst for such reform.
Tax relief – The costs of pension tax relief are already being scrutinised given pension saving is projected to increase by around £15 billion a year once auto-enrolment is fully phased in, a lower than anticipated opt-out rate would only focus further attention because it would increase the cost of tax relief.
Here is how we arrived at our estimated figures.
- 26.95 million employees.
- 7.4 million not eligible: based on tPR declaration of compliance auto-enrolment reporting estimated 27.47% are not eligible.
- Opt-out rates are located on page 19 of 22 from an impact assessment on tweaking auto-enrolments timescales for new employers.
- Assumed turnover rate of 15% for UK workers (although we recognise different industries have different turnover rates).
- 2,932,169 eligible employees changing job in 2019. If 27.5% opt-out, we have 806,346 missing out.
- We also estimate 780,000 people reaching the age of 22 (ie becoming eligible). A 27.5% opt-out here leaves us with a further 214,500 missing out.
- In total 1,020,846 employees opting-out.
- Only 380,000 of 4.8 million self-employed are saving into a pension, so 4.42 million are missing out.