By Dale Critchley, Policy Manager, Aviva
A brief history of the results so far:
- People started ‘voting’ in 2012 when automatic enrolment was introduced for the largest employers. Minimum contributions were set at 2% of earnings (typically 1% from the employer and 1% from the employee). People opted to remain in their scheme 9:1.
- In April 2018 contributions increased to 5% of earnings (typically 2% employer, 3% employee) but the number voting to leave didn’t change.
- The big challenge in April 2019 will be how many people vote to leave when contributions go up to 8% (3% employer, 5% employee).
I think when it comes to workplace pensions most of us want people to stay in their scheme. But we can’t be complacent. We must make sure that message is delivered to individuals who will be making their own in/out decision in the run up to April.
One thing that may make the decision easier is the timing of the change. The increased contributions coincide with increases to the personal tax allowances and the minimum wage, plus it’s the time businesses tend to announce any pay rises. All this will help offset the cost of staying in a pension scheme by reducing the impact on take home pay.
Staying in is the number one priority for 2019, but you don’t need to be an actuary to work out that the cost of membership had to increase. Saving 2% of earnings was unlikely to give most people a comfortable retirement.
Increasing contribution levels to 8% will make a real difference, potentially quadrupling the fund for those paying in the minimum over their working life (Dependent on investment returns. The value can go down as well as up and individuals could get back less than paid in). But if we want more people to have a comfortable retirement, more changes will be needed.
There are plans that will help. The Department for Work and Pensions will be consulting on proposals to abolish the lower earnings threshold. This will increase contributions, and therefore lifetime savings, the most for lower earners.
In the extreme, those part-time employees who earn a salary less than £6032 will be entitled to an employer pension contribution that they’re not entitled to now. Someone earning around £28,000 will see contributions increase by over 27%, taking contributions to an equivalent of over 10% of qualifying earnings.
The minimum enrolment age moving to 18 will also make a difference to those who choose to join the world of work at that age. An extra four years’ contributions and four years of additional investment growth could make an appreciable difference to pension wealth.
But, even with both of these combined, it probably won’t be enough for most people. Aviva is calling for minimum contributions to rise to 12.5% by 2028 to try to help give as many people as possible the opportunity for a decent retirement.
But let’s not run before we can walk. Having millions of people choose to remain in their scheme and save towards their retirement is a fantastic achievement. Let’s hope that message continues to resonate as we don’t want anyone to vote to leave their pension.
*Dependent on investment returns. You could get out less than you put in
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