AJ Bell press comment – 28 September 2022
As we approach the ten-year anniversary of the introduction of automatic enrolment in October, AJ Bell has commissioned research to better understand how the reforms are faring.
Here, we focus on the current economic climate and the impact the cost-of-living crisis is having on pension saving. Tomorrow, we will assess whether people are saving enough to meet their retirement ambitions.
Key findings:
- Over a third (34%) of eligible employees surveyed say they have either already opted out or are considering opting out of auto-enrolment*
- More than 1-in-10 (12%) of those who have opted out were not aware they would lose their employer contribution as a result
- Worryingly, approaching half (47%) of 18–34-year-olds have either opted out or could opt out
- Government urged to consider radical options to keep hard-up workers in the retirement savings habit
- One option could be to allow people who can’t afford to make a personal contribution to their pension to retain the employer contribution
Tom Selby, head of retirement policy at AJ Bell, comments:
“As we approach the 10-year anniversary of the first employee being automatically enrolled into a workplace pension, there are warning signs flashing over the impact rising inflation could have on retirement saving.
“Rising living costs are threatening to trigger a surge in opt-outs, with more than a third of those auto-enrolled members saying they have either already opted out or are considering opting out.
“Worryingly, younger savers appear more likely to quit their pension scheme than their older counterparts. Almost half (47%) of respondents aged 18-34 said they had either opted out or were considering opting out, compared to 29% of those aged 35-54 and just 16% of over 55s.
“This likely reflects the fact younger savers, on average, have lower earnings and might therefore feel less able to afford pension saving as prices rise. The decision to cap annual energy bills for the average home at £2,500 will undoubtedly help millions of people, but whether it will be enough to prevent a spike in opt-outs remains to be seen.
“Anyone thinking about quitting their workplace pension scheme during the cost-of-living crisis should ensure they have considered all other options before doing so.
“Opting out of auto-enrolment means you miss out not just on tax relief and tax-free investment growth, but also your matched employer contribution. By leaving your workplace scheme, you are therefore, in effect, taking a voluntary pay cut. Our research suggests around 1-in-10 (88%) of those who have opted out are not aware that in doing so they are missing out on an employer contribution.
“If you really feel you have no choice but to quit your workplace pension, make sure you have a plan to re-join as soon as you can afford to.”
Could auto-enrolment ‘opt-down’ option be part of the solution?
“Part of the challenge for people contemplating whether or not to stay in their pension scheme is the all-or-nothing nature of the decision. In most cases, there is no option to reduce or pause personal contributions while keeping the employer contribution.
“If Government is looking for radical ways to prevent mass opt-outs resulting from high inflation, it could consider temporarily allowing auto-enrolled workers to pause their personal contributions while maintaining their employer contribution.
“This would help limit the hit to people’s pension pots and maintain the link between the employee and their scheme. Once the current crisis has eased the mandatory employee contribution element could be reintroduced, with policy focus turning to raising contributions across the board.
“It is important to keep in mind that while saving for retirement may feel unaffordable during the current crisis, millions are not saving enough to enjoy a comfortable retirement. Staving off mass opt-outs may be the short-term challenge but boosting how much people save for their future remains one of the critical tasks facing UK policymakers.”
*Figures from a survey of 1,123 UK adults aged 22-65 and employed, conducted by Opinium on behalf of AJ Bell.
