More than 90% of employees who have been auto-enrolled into a workplace pension by their employer have stayed in the scheme, according to research by the Department for Work and Pensions (DWP).
Its Automatic-enrolment opt-out rates: findings from research with large employers report surveyed 50 employers, 42 of which provided opt-out data representing around 460,000 auto-enrolled employees. It found that, on average, just 9% opted out.
The research also found that overall participation in workplace pensions has increased among the employers surveyed, from 61% to 83%.
It also found:
- Opt-out rates were higher, at 16%, where employees had already opted out of a workplace pension.
- Opt-out rates were highest (15%) in the 50-plus age group and lowest (8%) in the under-30s age group.
Steve Webb (pictured), minister for pensions, said: “Seeing our largest employers report such low opt-out rates bodes well for this ambitious programme, which will see millions more putting money aside for the future.
“Too few people have been saving for retirement. It is all too often something to be put off, something for tomorrow. These figures show that people really value the chance to save into a workplace pension because they know they will also get money from their employer and the taxman too.
“The sooner people start a pension the better, and this report shows that young people are keen to take charge and plan for their future.”
It’s great news that opt-out rates are much lower rate than anticipated. But we should ask, are employees making informed decisions to remain in these schemes, or is inertia, the need to make an active decision to opt-out at work here?
While auto-enrolment is a step in the right direction, most newly enrolled individuals will not be saving enough. It’s not realistic to expect those who’ve been enrolled automatically to take an interest in their pension and increase contributions when they can afford to.
For DC and the automatic enrolment project to be a true success it’s necessary to embrace inertia through the design of pension schemes and how we communicate with members. For example, schemes that incorporate automatic escalations, whereby pension contributions increase in line with pay rises, in their design will deliver better outcomes. This is the principle behind a new, innovative DC system we’ve recently launched.
On the face of it, these figures look like great news for the auto-enrolment programme: less than 10% of employees have opted out. But the pensions industry needs to be very careful about patting itself on the back just yet.
The real measure of success for auto-enrolment will be whether the smaller employers can sustain this opt-out rate. Assuming postponement (which allows employers to delay the onset of auto-enrolment by up to three months) has been applied by many, if not all organisations in the data sample, the statistics today cover just five months of data for only the very largest organisations that have been through the auto-enrolment process. They’re the businesses with the largest employee numbers, established pension schemes, and the deepest pockets when it comes to communications and employee engagement.
The next 12 to 18 months will be crucial in terms of establishing the full picture for auto-enrolment. When SMEs and micro-employers that may have never engaged with pensions start the auto-enrolment process, that’s when we’ll see the true picture of how successful targeting non-pension scheme members has been.
An established opt-out rate as low as 9% is very encouraging and if it were to continue at or anywhere near that level would represent a major success for the policy, probably way beyond the government’s or indeed anyone else’s expectations.
But it is early days and, as the report itself acknowledges, the analysis is not based on a fully representative sample of employers. The results cannot be applied to the whole population of employers particularly as medium and smaller employers will have different characteristics to larger employers, such as lower existing participation levels in workplace pensions.
It also needs to be borne in mind that the reference to opt-outs applies specifically to those employees expressing a wish to come out of the scheme in the first month after having been enrolled and does not include those ‘ceasing active memberships’ in the second or subsequent months afterwards. There is some anecdotal evidence not referred to in the report that, including that latter group, could materially alter the figures.
It is interesting, but perhaps not surprising, to note that opt-out rates were higher among those aged 50 and over than for other age groups. For six employers that were able to provide full breakdowns by age group, opt-out rates for those aged 50 and over were between 25% and 50% higher than those of other age groups. In one typical example, the under 30s opt-out rate was 8%, compared with 9% of 30-49 year olds and 15% of those aged 50 and over.
From such a small sample it would be unwise to draw too many definitive conclusions, but overall, auto-enrolment appears to be heading in the right direction and is certainly not the disaster many critics suggested it might be.
Today’s announcement by the government that fewer than one in ten have opted-out of automatic enrolment into a workplace pension scheme is extremely encouraging. The increasing participation in pension schemes, with many people entering one for the first time, will inevitably help to reverse the decade of decline in pension saving in the UK and will improve retirement outcomes for many.
However, with the first wave of auto-enrolment inductees reaching their one year anniversary at a time when the economy is starting to recover, pension savers still need encouragement to consider increasing their contribution levels, where they can afford it.
Members need educating so as to avoid falling into a false sense of security around auto-enrolment, engaging with their adviser or provider planning tools to make decisions will help to ensure they have the best possible retirement outcome. Employers also need to ensure that all employees have the relevant tools in place to help their staff track and monitor their pension and make effective planning decisions.
As an industry, we are currently seeing a number of providers adjusting the pricing of schemes as lower contribution and shorter policy durations begin to have an impact and we continue to wait for further clarity from the government around their plans regarding caps on charges for auto-enrolment members.