Thousands of low and moderate earners are opting out of pension saving as they struggle to make ends meet after a sharp increase in deductions from their pay packets was introduced in April.
The underlying opt-out rate has risen from 7.98 per cent to 8.18 per cent in the past two months, according to Now Pensions, the first big auto-enrolling master trust to disclose the impact of the contribution changes.
The increase in employee deductions has been seen as a key test for auto- enrolment — the government’s campaign to “nudge” millions of low earners into pension saving for the first time.
Auto-enrolment is seen as a success, with about nine million people starting to save for the first time since 2012, when it began to be phased in. However, the initial employee contribution was set at only 1 per cent of qualifying earnings, defined today as earnings in excess of £6,032, leading to concern that more people would opt out when the rate was tripled from April.
Now Pensions, an offshoot of the Danish state pension scheme, runs auto-enrolment schemes for 30,000 employers in the UK, most of them small businesses but also a handful of larger ones, such as Fitness First, the gyms group, and Cineworld, the cinemas chain.
The company, which is one of the biggest platforms with 1.75 million saving customers, said that 23,800 people had opted out in the two months since deductions had been raised. That was 1,750 more people than it would have expected if the opt-out rate had remained at the previous year’s level, according to Adrian Boulding, head of policy at Now Pensions.
The opt-out numbers include new recruits to client employers who bale out from the pension scheme in the first six weeks of their employment, as well as existing employees previously enrolled in the scheme who change their minds.
“A small number of people have been deterred by the increase in deductions, but the numbers demonstrate that the vast majority are sticking it out,” Mr Boulding said.
Another test of auto-enrolment comes next April, when the minimum employee contribution is due to rise to 5 per cent. Minimum employer contributions were raised from 1 per cent to 2 per cent in April and will be raised to 3 per cent next April.
The squeeze on real incomes over the past year, as inflation overtook wages growth, was another reason that the increase in deductions could have pushed more low earners to opt out.
Two factors softened the blow for many low-paid employees. One was the 4.4 per cent rise in the national living wage from £7.50 an hour to £7.83 in April. The other was a rise in personal allowances for income tax and national insurance from April.
Separate data yesterday from the Department for Work & Pensions showed that the percentage of eligible employees participating in a workplace pension scheme was 84 per cent last year, up from 77 per cent in 2016. However, the proportion saving most of the time has fallen. The percentage saving in at least three of the past four years fell from 77 per cent to 73 per cent.
There were huge improvements in the participation rate in hotels and restaurants, up from 27 per cent in 2012 to 77 per cent, and in farming and fisheries from 44 per cent in 2016 to 68 per cent.
All employees over the age of 22 have to be enrolled in a workplace scheme of minimum standards and must opt out to avoid having their pay deducted.