Step up in pension contributions 'unlikely to fatally undermine auto-enrolment'

Next month's increase in minimum workplace pension contributions is unlikely to fatally undermine its success and trigger mass opt-outs, according to analysis by a mutual insurer.

Automatic enrolment into workplace pensions started in 2012, and currently the minimum contribution rate is 2%, comprising 1% from staff and 1% from their employers.

From April 6, minimum contribution rates rise to a combined 5%, with a minimum of 2% from the employer and the remaining 3% from staff.

In April 2019, the rate will increase again, to 8%, with a minimum of 3% from the employer, leaving a 5% minimum staff contribution.

Take-up of auto-enrolment so far has surpassed expectations, with around nine in 10 people choosing to stay in their pension rather than opting out.

Minimum contributions are gradually being increased to help encourage people save enough for a comfortable retirement.

Royal London said it has been estimated that between six and seven million workers who are currently paying at the legal minimum level will be asked to contribute more than £2 billion extra between themselves and their employer, prompting speculation that cash-strapped workers might opt out in large numbers.

But the insurer believes the minimum contribution hikes will not create a rush to opt out of workplace pensions, arguing that several factors will help to keep workplace pension scheme membership high.

It said the pension contribution increases coincide with a new tax year - when many workers can expect to get pay rises which will help to offset the rise in contributions. Employees' pension contributions also benefit from tax relief.

Increases in the national living wage and income tax thresholds will also help to limit the number of people seeing a fall in take-home pay when pension contribution rates increase, Royal London said.

Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: "The power of inertia remains strong - individuals will still have to actively opt out and the additional amounts they are being asked to contribute are still relatively modest, especially for the lowest-paid workers, who will be receiving a large increase through the national living wage.

"Evidence from the US suggests that when contributions into workplace pension schemes were gradually increased by a few percentage points from low single-digit rates, opt-out rates were very low, and the same is likely to happen in the UK.

"We believe that relatively modest increases in contributions, combined with pay rises, especially for the low-paid, are unlikely to fatally undermine the success of automatic enrolment.

"The real focus should already be on how to get savers beyond the 8% minimum level that they will reach in 2019 and up to more realistic levels."

Guy Opperman, Minister for Pensions and Financial Inclusion, said: "It's fantastic news that more and more people can look forward to a financially secure retirement.

"But there is still more to do to ensure that everyone is building up good private pension savings, including increasing contributions, and we have recently announced a package of measures to ensure that even more people benefit from a workplace pension."