Why opt-outs are not the only measure of AE success

According to the Pensions Regulator, by the end of August 2014 more than 4.4m workers working for 27,818 employers had been auto-enrolled into qualifying workplace pension schemes. 

We also know that Nest now has more than 1.5m active members. Together with the other major defined contribution pension providers, they estimate opt-out rates of less than 10 per cent, which is considerably lower than some had predicted.

There is clearly the possibility that opt-out rates will increase as the size of employers staging in future decreases. However, it seems unlikely that overall opt-out rates will increase substantially while member contributions are limited to the current 1 per cent minimum.

Auto-enrolment has been a success in terms of getting workers into a pension scheme and keeping them there, but opt-out rates do not tell the whole story.

There are a significant number of employees who are not eligible for auto-enrolment in the first place, and even more who are only making minimum contributions. 

It could therefore be argued in the longer term that member engagement will be a crucial measurement of the policy’s effectiveness.

The AE catchment

We estimate that one in three of those who were not in a pension before auto-enrolment will not be eligible jobholders – largely because they do not earn enough, but they also include those aged under 22 or over state pension age. 

Roughly half of these individuals could opt in if they wished and obtain an employer contribution, but have chosen not to. In practice this may be a good thing as their state pension will give them a significant proportion of pre-retirement earnings and, if you did include them, the administration costs would in many cases be greater than the contributions. 

Even so, we should be careful that too many workers are not excluded in the long term. Research into this group and their income progression over time would be helpful.

The 2014 Budget changes have also had a positive effect. Anecdotal evidence is that member engagement has increased (albeit from a very low starting point) since the changes were announced. However, there is clearly a danger of misunderstanding and confusion over the tax treatment of the various new options. 

The Budget could encourage members to make additional contributions above the minimum qualifying amounts. Many employers are auto-enrolling only at the minimum requirements (matching 1 per cent qualifying earnings), but will match contributions to a significantly higher limit within their auto-enrolment scheme. 

This would be a policy success for auto-enrolment, but employers might not see an increase in their contributions in such positive light. Employers will wish to obtain some business benefit from higher contribution costs – greater employee engagement should lead to lower staff turnover and thus to higher profits – but effective communication is needed to turn the kudos of higher contributions into genuinely greater engagement.

Another metric of policy success must be employer compliance. So far this has been overwhelmingly positive. The vast majority of employers who have staged so far have tried to abide by both the letter and the spirit of the regulations. Where there have been failures they have mostly been as a result of overly complicated regulations.

However, this might not always be the case. As we move to bringing smaller employers into auto-enrolment, there is a danger some may feel the chances of being caught are low enough that non-compliance is a viable business strategy. 

In practice we do not believe this will be the case, and any employer who thinks they can get away with 'forgetting' to auto-enrol their eligible jobholders is in for a nasty surprise. Between the regulator’s intelligence unit, audit procedures and whistle-blowing, it is difficult to see how any employer will avoid being caught out. 

Auto-enrolment has been a success and will probably continue to be so, thanks in part to the 2014 Budget. The challenge will be to ensure even greater participation by both employees and employers.

Andy Cheseldine is a partner at consultancy LCP