Businesses cannot rely on the “inertia” of pensions auto-enrolment to ensure employees save enough for their retirement, experts have told People Management.
This weekend minimum contributions for auto-enrolment pensions are set to increase to 8 per cent, with at least 3 per cent being contributed by the employer. The increase has been generally welcomed as a positive step towards helping people save, and businesses are not expecting to see large numbers of opt-outs.
However, individuals saving at the new, higher minimum rate can still only expect to save enough for a basic income on retirement, said Nathan Long, senior pensions analyst at Hargreaves Lansdown, and businesses now need to focus on making sure employees understand the importance of saving more.
“When you’re joined into the pension scheme, it completely relies on inertia,” Long told People Management. “You’re given a minimum amount of information, you don’t have to make any choices whatsoever. You’re all sorted and on your way to saving for retirement.
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“But when we get to retirement, we need to make a whole load of choices about how we use that pot of money. Not only that, the level of contributions that are going into a pension are probably enough for us to get by.
“[Auto-enrolment] is a great benchmark position; it lifts everyone to a level where they can live reasonably comfortably, but actually lots of people will want more and it’s for them to decide whether they save more or not.”
Hargreaves Lansdown estimated the average employee will see their spending power drop by around £30 a month because of the larger contributions, which might be a squeeze on lower earners, but despite this Long does not expect higher rates of opt-outs.
Organisations themselves are also, for the most part, well prepared for the increase in the contribution, having had plenty of time to budget for the change. “That doesn’t mean they’re amazingly well prepared, but this isn’t the shock factor we saw when people were first battling with auto-enrolment,” he told People Management.
However, both businesses and pension providers have a responsibility to encourage employees to save more if they wanted a higher standard of living in retirement.
Sophia Singleton, partner and head of defined contribution consulting at Aon, said most of her clients have also budgeted for high opt-in rates at the new, higher contribution level.
In many cases, Singleton said, businesses were actually bringing in people at a rate higher than the default minimum, and where this was the case many were seeing 80 per cent or more employees remaining at the higher rates. Those who opt to reduce their contribution also tended not to go down to the lowest level.
“The key thing here is apathy plays a huge part. [Employers] ‘choose’ a contribution rate based on what the employer does, they follow what’s done for them,” she added.
Employers are seeing there are going to be other challenges down the line with workforce management because of an ageing workforce, said Singleton, with more people choosing to work into retirement or even expecting not to retire at all.
“Some of that is choice, but our research also shows people realise they’re not going to have enough money in retirement. That’s why some employers are starting to address this themselves through their contribution structures.”