Automatic Enrolment: Contributions to workplace pensions set to fall

02/01/14
News

Auto EnrolmentA new survey looking into the trends in workplace pensions has found that contributions are set to fall over coming years, largely due to the implementation of Automatic Enrolment.

The 2013 pension trends survey, published by the Association of Consulting Actuaries (ACA), uncovered some revealing statistics after contacting over 300 employers:

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  • Average contributions levels to defined contribution schemes, such as Group Personal Pension or Group Stakeholders, have remained static over the past 10 years
  • Employer contributions to workplace pensions average between 4.5% and 7% of earnings
  • The average employee contribution is between 4% and 4.5% of earnings

Looking specifically at Automatic Enrolment the survey found:

  • 80% of smaller employers have not yet budgeted for the costs of Automatic Enrolment
  • Employers see the initial stages of preparing their business for Automatic Enrolment compliance as the most difficult
  • Larger employers, with more than 5,000 workers, estimate between 6% and 10% of employees will opt out. However, firms with less than 50 employees believe the figure will be far higher at 26% to 30%
  • 61% of employers expect their payroll costs to rise by 2% due to Automatic Enrolment, but half of smaller employers expect costs to rise more steeply

Automatic Enrolment isn’t enough

Whilst Automatic Enrolment will undoubtedly give more employees access to a workplace pension, there has been criticism that the initial contribution levels are too low and will fail to produce the size of pension needed to sustain a comfortable retirement.

For those who are eligible and remain opted in after being automatically enrolled, contribution levels will start at 2%, split equally between the employee and employer. Contributions will then rise to 8%, of which at least 3% needs to be paid by the employer, in 2018.

However, unlike most existing workplace pensions, the contribution is calculated as a percentage of earnings between £5,668 and £41,450 (in the 2013/14 tax-year). Contribution levels to workplace pensions are therefore likely to initially fall, as the 2% starting amount is lower than is usually seen with workplace pensions and somewhat confusingly is only based on a percentage of ‘band earnings’, not the full salary.

Andrew Vaughn, Chairman of the ACA, said: “With most employers seemingly auto-enrolling at the minimum level of contributions (2% of qualifying earnings), we can expect average contributions to decline over the next few years before climbing in 2018, when the minimum of 8% of qualifying earnings will be required in all firms. Auto-enrolment on its own isn’t enough.”

Vaughn continued: “And with the State Pension Age moving towards 70 for today’s younger employees, the added value of higher private pension savings is becoming clear. It is certainly time to save more for tomorrow.” (Source: ACA)