AE review 2017: 12 million under-saving but majority saving more than minimum
DWP analysis reveals that 12 million workers are currently under-saving but reveals majority of employees and employers are contributing at a higher rate than AE minimum.
As part of its 2017 auto-enrolment review - published today - the Department for Work and Pensions (DWP) has published a research report looking at the effects of workplace pension reforms. The key findings are as follows…
The impact of automatic enrolment and wider trends
• 78% of eligible employees (16.2 million people) participate in a workplace pension (2016), up from 55% of eligible employees (10.7 million) in 2012 before the reforms were introduced. Participation rates were highest among the largest employers, those employees earning the most, older employees and were slightly higher among women when compared to men. However, the biggest increases in participation have been amongst younger people, those with lower earnings and those working for smaller employers.
• The 2017 Employers' Pension Provision Survey (EPP 2017) found that the average opt-out rate was 9% - the same as the previous survey (EPP 2015). Opt-out rates were higher for small and micro employers (an average of 12% and 10% respectively) than for medium and large employers (an average of 9% and 8% respectively).
• EPP 2017 found that cessation rates for all employers stood at 16% and figures were the highest for medium and large employers. Of those employers who had employees who had ceased saving, the majority (67%) had ceased due to leaving their job.
• Employers were adopting levelling down strategies for 10% of eligible employees in 2016 - up from 6% in 2012. However, there is no evidence that this is a result of auto-enrolment and it is likely that other factors have driven employers to try and make savings on their pension costs. Emerging findings from EPP 2017 suggest that employers are primarily absorbing increased contribution costs as part of their ‘other overheads' (cited by 70% of employers).
Delivery of reforms
• By the end of November 2017, over 9 million workers had been successfully automatically enrolled, with more than 938,000 employers having completed their declaration of compliance over the same period.
• Moreover, by the end of June 2017, the regulator had concluded more than 60,000 cases investigating possible non-compliance by employers.
• Spontaneous awareness of automatic enrolment among employers yet to stage remained strong, with especially strong awareness among those employers expected to stage soon - over 85% of ‘early stagers' (employers staging between January and April 2017) were aware of automatic enrolment. ‘Early stagers' also tended have a fairly strong understanding of their duties under automatic enrolment, with a rate of just under 70%.
• Across the board, awareness and understanding was strongly linked to staging date - employers with staging dates sooner tended to be more aware of both automatic enrolment itself, and their subsequent duties.
The effect of automatic enrolment on contribution levels and amounts saved
• By 2019/20 an additional £19.7bn will be contributed to pensions annually as a result of automatic enrolment.
• In 2016, the majority of employees were contributing at a higher rate than the minimum (of 1% contributions) and were receiving employer contributions at higher rates than currently required by automatic enrolment. Over 5.6 million eligible employees (54% of eligible employees) saving into a workplace pension had a contribution rate of band earnings of 2% or above and over 6.6 million eligible employees (64%) saving into a workplace pension received an employer contribution of 2% or above.
• The vast majority of employers matched higher contribution rates made by their employees: in 2016, nearly 94% of automatically enrolled employees in private sector DC schemes contributing over 3%, received a matching (or higher) employer contribution rate.
• There has been an increase in ineligible employees and their respective employers saving into pensions, with peaks in contributions occurring at the minimum contribution levels. Furthermore, fewer employees, in 2016, contributed nothing, or received zero employer contributions, to a workplace pension than was the case in 2012. In 2016, 813,000 (7.7%) eligible employees with a workplace pension made zero pension contributions, down from one million eligible employees (17.9%) who made zero contributions in 2012. Similarly, in 2016, 165,000 (1.6%) eligible employees with a workplace pension received zero pension contributions from their employer, down from 196,000 (3.5%) in 2012.
• Median employee contribution rates among workplace pension members in the private sector decreased from 4.5% in 2012 to 2.4% in 2016. Similarly, median employer contribution rates among workplace pension members in the private sector also decreased from 10% in 2012 to 4% in 2016. This is because many of the employees and employers that are newly saving are likely to be making the current minimum contributions specified under automatic enrolment rules - this influx of new savers has therefore brought the overall average rates observed among all savers down.
Undersaving analysis
• Using existing undersaving methodologies and based on existing automatic enrolment rules on coverage and contributions, it is estimated that the introduction of automatic enrolment reduced undersaving from 14 million (45%) to 12 million (38%) individuals. Of the 12 million currently undersaving, around 1.6 million (13%) fell into the bottom two pre-retirement earnings bands (earning less than £25,000 a year in today's earnings terms) while more than half of all undersavers are earning more than £34,500 in the run up to retirement.
• Of the 1.6 million undersavers in the two lower earnings bands, just over half (around 800,000) were within 20% of their target pension income. Therefore, extra saving in this group, e.g. by starting pension saving younger, could effectively reduce undersaving for this group.
• In the absence of automatic enrolment, an estimated 48% of the youngest cohorts would have been undersaving, significantly greater than the 33% amongst the oldest cohorts. The introduction of automatic enrolment has substantially closed that gap to 36% undersaving amongst the youngest cohort.
Review directions analysis
• In 2016, over three-quarters (78%) of workers met both the age and earnings criteria to be eligible for automatic enrolment. An additional 7% met the age criteria and had earnings between the LEL and the trigger, so were entitled to employer contributions if they opted in. Similarly, an additional 2% were aged 18-21 or 65-74 and had earnings over the LEL but below the trigger, so could also opt in with entitlement to employer contributions.
• Removing the LEL would create an additional £2.6bn in annual pension savings through an additional £1bn in employer contributions, £1.2bn in employee contributions and £0.4bn in income tax relief on individuals' pension contributions in 2020/21.
• Lowering the lower age limit from 22 to 18 increases the eligible target group by 0.9 million individuals and total annual pension savings by £770m in 2020/21. 7
• The combined additional pension saving associated with removing the LEL and lowering the age limit to 18 are just over £3.8bn in 2020/21, comprised of £1.4bn in additional employer pension contributions, £1.8bn in additional employee pension contributions and just under £0.6bn in upfront tax relief on individuals' pension contributions.
• Case studies were used to assess the impact of the proposals (reducing the lower age to 18 and removing the LEL) on individuals:
- For a National Living Wage earner with a full work history, the proposals would result in: an estimated two% reduction in annual net pay (-£235 per year); a 76% increase in annual pension contributions (£470 per year); an 82% increase in pot size at retirement (£40,400); and an 18% increase in annual net pension income (£2,300 per year).
- For a median earner with a full work history, the proposals would result in: an estimated 1% reduction in annual net pay (-£235 per year); a 27% increase in annual pension contributions (£470 per year); a 43% increase in pot size at retirement (£55,900); and an 18% increase in annual net pension income (£3,100 per year).
Self-employed transition analysis
• The median length of time until an individual's first period of self-employment is ten years. Just over 7% of individuals with a period of self-employment start out as self-employed. The median age at which somebody becomes self-employed is 32.
• The majority (nearly 75%), who had at least one year self-employed, had spent less than half of their working age years with self-employment denoted as the main activity. Around a third (35%) had spent 15% or less of their working-age years with self-employment as their main activity. Only a small proportion (4%) had remained self-employed across all years.
• Many of the self-employed had previously spent time in employment: the vast majority (around 88%) of individuals who had had at least one year self-employed also had at least one year where employment was their main activity. Over 47% had more than half of their years with employment as main activity.
• Evidence from analysis of transitions and flows between self-employment, employment and other activity suggest that the flows have increased with each successive generation: for example, approximately 12% of the millennial cohort (aged 20-38) flowed from employment to self-employment each year compared to six% of baby boomers (those aged 51 to 69).
Multiple job-holders
• As at the end of the March 2017 tax month, there were approximately 1.11 million people with multiple jobs. The majority of multiple job-holders (MJHs), over 70%, were already eligible for automatic enrolment as they earned £10,000 or more in all or at least one of their jobs.
• Of the 1.11 million multiple job-holders, around 975,000 (88%) were aged between 22 and State Pension age (SPA). There were around 78,000 (7%) MJHs between the ages of 18 and 21 and a further 41,000 (4%) greater than SPA.
• Approximately 64% of the MJH population are female - more than the gender split of overall employments where only around 47% of employments belong to female workers.
• Approximately 517,000 (53%) multiple job-holders, between the ages of 22 and SPA, were paying pension contributions, as at March 2017. Furthermore, some of those ineligible for automatic enrolment were making workplace pension contributions: 43% of those ineligible for automatic enrolment despite having a combined income over the £10,000 per year trigger and 32% of those not entitled to receive employer contributions despite having a combined income over the LEL were contributing to a pension.
• Widening the age criteria would increase the overall number of MJHs eligible for AE by around 28,000 individuals aged 18 to 21.
• The proposed removal of the LEL would mean all workers subject to automatic enrolment would pay contributions from £1 of earnings. This would mean MJHs who earned under the earnings trigger in any of their employments could choose to opt in and would automatically be entitled to employer contributions. MJHs earning above the earnings trigger in one or more of their jobs would be entitled to increased employer contributions (from £1).
Engagement analysis
• The ‘Automatic Enrolment: Life Journeys' map highlights key findings which may be useful in designing initiatives to support engagement, as follows:
- Segments at greater likelihood of opting out are mostly concentrated towards the lower end of the income distribution. Therefore initiatives which are designed to reflect their circumstances, capabilities and preferences are likely to have greatest impact.
- Life transitions or changes which could increase the risk of cessation or opt out interact with re-enrolment. Re-enrolment itself, whether by an existing employer every three years, or at the point when an individual changes job, provides a ‘teachable moment' when engagement activity may contribute to an individual remaining enrolled rather than opting out again.
- Younger age groups tend to learn more easily, suggesting that information and communications aiming to reinforce inertia, for example by emphasising social norms, may best be targeted at younger age groups. As these people then age, those learned messages may then, over time, create cultural norms and beliefs right across the age spectrum which help to support the default of automatic enrolment and minimise opt out.
Statutory requirements analysis
• Since automatic enrolment was introduced, certification under the alternative quality requirements would have delivered at least as good an outcome for over 90% of jobholders.
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