Auto Enrolment, now 16 months in, has been a glowing success thus far. Already more than two million new AE pension scheme holders have started saving for retirement – many of them for the first time, others boosting their retirement saving by so doing.
To top it all, only 9 per cent are opting out of AE schemes when they are offered them – far lower than the 30 per cent that was predicted.
In the first two months of this year we will see another 4,000 medium-sized businesses auto enrolling their staff and in May alone a total of 12,000 new firms will hit their staging date. In July another 12,500 firms will join and by the end of 2017 as many as 90,000 firms per month will need to be processed into AE schemes.
By 2018, when all qualifying employees have been enrolled, AE pension holder numbers are set to swell to somewhere between 6m and 9m, quite possibly tripling the number of overall DC workplace pension scheme members to 14m altogether. Great news for the industry and retirement savings picture of the country it would seem; but AE scheme providers are already handling more than seven times more new business documentation than they are used to each month and systems are clearly starting to creak.
There are already reports of welcome packs and opt-out forms being sent to employees several weeks after their first contribution payments have been processed, for example. Several major providers have made early announcements on their intentions to exit the AE market as early as 2015. Scottish Life is one such. The provider has also warned smaller businesses not to leave AE entry too late if they want to have a choice of scheme provider at all.
It seems clear that there will definitely be administrative issues for providers not just at enrolment. As contributions escalate from 2 per cent of qualifying earnings today to 8 per cent by 2018, we will see a wave of opt-outs and a reduction of the initial percentage of opt-ins, many think.
But in the interim, somewhat counter-intuitively, the Association of Consulting Actuaries is expecting average DC workplace contributions to fall fairly dramatically from the body’s upper average employer-employee contribution estimate of 9.2 per cent today to a figure much closer to AE minimum contribution levels.
So contributions will be heading away from the ideal minimum of contribution which perceived wisdom puts at 12 per cent of income. Opt-out levels will also be influenced by fund performance. Statistics indicate that a drop of 16 per cent or more in fund values of members’ pensions will be enough for large number of people to stop paying in.
Clearly existing heavy exposure to equities in AE schemes’ underlying funds will also expose the market to large waves of paid-ups and opt-outs if share prices begin heading south again. It addition, the promised automatic small ‘pot follows’ transfer regime will need to be in place to automate the transfer of sub-£10,000 AE pots to new employer schemes as employees move on, after the Pensions Bill 2013 passes into law, again during the next 12-18 months.
