29 March 2018
As minimum contributions to auto-enrolment schemes rise from 3% to 5% (a change effective from April 6), it seems inevitable that people will drop out of their schemes as the contribution increases hit their disposable income. The Finance and Technology Research Centre’s recent study found that contributions for an average employee would raise from 4% to a 13% of disposable income. For many this will be a step too far.
As data for opt outs emerges in the coming months, it will be vital to look for ways to improve outcomes for the next round of contribution increases in April 2019.
Despite the increase to 5% looking daunting for some people, even the 8% it will increase to next year is nowhere near enough for people to be able to have retirement security. Just because people are enrolled at a base level, they should not be lulled into a false sense of security. To truly have enough to live on in retirement, people will need to save far more.
In my view the only way we can achieve this is by educating scheme members regarding the value of their pension schemes, and this should be a priority for employers and Trustees. Communication is key, people need to understand the value of the ‘free money’ they’re giving away by not saving into a pension scheme. No one would say no to a pay rise, so if it’s affordable they shouldn’t say no to their Company contributing into their long-term savings.
Technology can also be harnessed to encourage savers to remain opted in. Technology is increasingly pervading all areas of our lives, including in the workplace. People have the ability to monitor their heart rate and tot-up how many steps they take a day, and have everything personalised for them at the touch of a button, but as soon as pensions enter into the equation, all thoughts of digital innovation fly out of the window. This need not be the case.
The Pensions Dashboard is a start, but in order to persuade people to not opt out, perhaps there could be an effort to show people how much more they are saving on the 5% contribution compared to the 3% contribution over a 10 year period, with further projections for the 8% rise in 2019. People could then focus on the money they will be gaining in the future rather than the hole they see in their pay packet. Tracking the trajectory of your future retirement fund is a way to focus savers’ minds on the longer term. Attaching real figures to map out the future impact of auto-enrolment savings will make pensions more tangible and will help provide a clearer picture of the ‘light at the end of the tunnel’.