News analysis: More than half of employers back auto-escalation schemes as a way to increase employee contributions, according to new research, but they may face challenges in tailoring contribution rates to members.
Fifty-seven per cent of employers support the idea of auto-escalation in defined contribution saving, where members preset to increase their contributions, usually in line with pay increases, according to research by the Association of Consulting Actuaries.
There are some practical difficulties in determining how much someone should be contributing
More employers are considering this type of scheme as they realise minimum auto-enrolment contributions are not going to be enough for members to retire when they would like, industry figures have said.
However, a single escalation structure may not suit the savings needs of all members.
“There are some practical difficulties in determining how much someone should be contributing,” said Laith Khalaf, head of corporate research at Hargreaves Lansdown. “Some may have large savings to draw from.”
Determining how much to increase contributions by and whether to do this every year or at a certain age point is challenging for employers, added Saq Hussain, head of DC consulting for the north at PwC.
“The challenge is around how much you need people to contribute and are you trying to get them to that target or are you [just] trying to get people to save more than the minimum,” said Hussain.
He added: “Linking [contributions] to pay rises is the right way to do it. People don’t know how much they need to save into a pension plan.”
An increase in employer contributions in tandem with member contributions can increase the take-up of auto-escalation plans, Hussain said.
These types of scheme design have been criticised for detracting from the idea that members should take responsibility for their own retirement saving. But others have said any escalation is better than nothing.
Such schemes have not been widely implemented as many believe there will be changes to statutory employer contribution rates, said Andy Cheseldine, partner at LCP. “Most employers think that come 2017 the employer contribution [rate] might go up from 3 per cent anyway,” he said.
Therefore some employers do not want to put in place a structure that would result in them having to contribute even more in future, he added.
