A report released last week found smaller employers may consider decreasing basic pay to implement auto-enrolment, while experts said implementing the reform will lead to a focus on benefit structure.
The Pensions Policy Institute's report entitled How Will Automatic Enrolment Affect Pension Saving? found "tentative evidence that employee opt-out rates are higher when the initial employee contribution is set higher".
Further findings
Under auto-enrolment, assuming the low 9% opt-out rate persists, the number of people actively saving in DC could reach 14.5m by 2030, with a total asset value of £495bn.
Without auto-enrolment, private sector DC assets in 2030 would only have been around £350bn.
The Department for Work and Pensions last year estimated the opt-out rate among large employers to be 9 per cent, but experts agreed this rate may increase as smaller employers implement the reform.
"The vast majority of smaller companies will meet the bare minimum in terms of contributions and the minimum compliance," said Roger Mattingly, director of independent trustee company Pan Trustees.
"In a way, the Budget proposals slightly lessen that potential problem," he added, explaining that if obligatory annuities remained, such small savings contributions would effectively be rendered worthless.
The report also found "smaller employers may be less knowledgeable about their duties under the new regulations and less likely to support the principle" of auto-enrolment.
Andy Cheseldine, partner at consultancy LCP, said small employers only paying the minimum contribution should not be seen as a negative reaction to the new rules, but rather a focus on "basic pay, work environment" and other employee benefits.
However, the PPI’s report predicted that some levelling down may occur to absorb the costs of auto-enrolment, either by cutting basic pay or by reducing profits.
Initial administration costs associated with setting up an employer-specific scheme could be significant. Mel Duffield, deputy director at the PPI, said subscription to multi-employer schemes "means the employer doesn’t have to put that governance in place themselves".
It is estimated that collective DC schemes such as Nest will cater for 57 per cent of private-sector savers in 2018.
Any future changes in the minimum employer contribution level will have a strong impact upon the pensions assets developed under the new rules.
"I don’t think the government has made any commitments to do that as yet," said Duffield, arguing that the focus is likely to remain on successful implementation for some time.
There is a government review scheduled for 2017, and Mattingly predicted that unless there is an economic crisis, contribution rates will rise. "There’s no way an informed review can say we’re quite happy for them to stay the same," he said.
But Cheseldine predicted a 1:1 match of employee and employer contributions would seem fairer to workers. "Employees are going to start to ask for, if not demand, higher levels of contribution from the employer," he said.
