Auto-enrolment is part of a government initiative to encourage more people to save for retirement. Unfortunately, a large proportion of the UK population is not doing so and as the ratio of retired people to those working grows, there is a need for people to make private provision for their retirement and avoid being reliant on the state.
The Pensions Regulator (TPR) has stated that many self-invested personal pensions (Sipps) will not be suitable for auto-enrolment as they were never designed for the mass market. However, such a large-scale change to pensions will surely impact the market in one way or another.
Why auto-enrol?
The initiative involves requiring employers to automatically enrol eligible employees into a qualifying workplace pension scheme. Although employees have the right to opt out of the scheme, the expectation is that a high proportion will remain in the scheme if for no other reason than inertia.
Although a proportion of the population already participates in workplace pension schemes arranged by their employer, or have taken out a personal pension or Sipp of their own accord, it was felt more needed to be done to encourage greater retirement saving. That tendency to inertia again may have had a part to play in the lack of pension saving. Many may have realised that they ought to start saving for retirement but never quite got round to doing so, or perhaps have not been sure how to go about it. To have the decision made for them could be just what they were waiting for.
As a further plus point, there is a requirement under auto-enrolment rules for employers to make a minimum contribution to the auto-enrolment pension scheme. Logically, then, it would make sense for employees to remain in the scheme to take advantage of the contribution from their employer.
More than minimum
Although it is possible for an employer to pay the total minimum contribution required by the auto-enrolment rules, the likelihood is that employers – especially employers who do not already provide a pension scheme and are effectively now being forced to do so – will just make a contribution of the minimum amount required of them. In that case, employees will also be required to pay a contribution to ensure the overall minimum contribution is met. Details of the contribution levels are outlined below.
| Auto-enrolment contributions | |||
| Up to September 2017 | October 2017 - September 2018 | October 2018 onwards | |
| % | % | % | |
| Minimum employer contribution | 1 | 2 | 3 |
| Total minimum contribution | 2 | 5 | 8 |
| Applicable to band earnings of £5,668-41,450 at 2013-14 earnings thresholds. Source: The Pensions Regulator. Copyright: Money Management | |||
Where employees are required to make a contribution under auto-enrolment, it stands to reason that affordability could be a big factor in influencing the decision to opt out. Here it is necessary to explore the meaning of affordability. There will be a proportion of employees who genuinely have no money to spare over and above basic costs of essentials for daily living and will opt out to avoid a lower take-home pay.
For others who do have an element of discretionary spending, it may mean they would have to sacrifice some lifestyle choices to afford the contribution. But even where discretionary lifestyle spending is being sacrificed for saving it may be considered more critical to make short-term savings, for example, for a mortgage deposit, or into savings arrangements that offer greater accessibility than pensions. Such considerations could lead to decisions to opt out.
