The government has been told it should create a middle way when it comes to auto-enrolment, amid fears many will drop out when the minimum total contribution tops eight per cent.
Tom Selby senior analyst at AJ Bell, said existing rules on pension auto-enrolment will eventually force employees to choose between a minimum large contribution or opting out completely.
He fears that without an option to ‘opt down’ – lower employee contribution rates – savers will drop out of workplace pension savings in their entirety.
Mr Selby said while eight per cent was not enough of a contribution to allow savers to build up an adequate pension, increasing the default total contribution to 12 per cent could cause a surge of opt outs.
He proposed a new system where customers could choose to ‘opt down’ to an eight per cent contribution as well as opting out of auto-enrolment altogether.
Customers who chose to do either would be automatically moved back to the full rate every three years unless they chose to opt out again.
“The all or nothing nature of opt-outs should be revisited,” he said.
“By doing this, the government could potentially increase pensions adequacy without increasing opt out rates and casting huge numbers of savers into the retirement wilderness.”
“The government, employers and wider pensions industry will soon have to face up to the crucial question of how to get automatic enrolment contributions up to a level which will provide a decent retirement income,” he added.
Auto-enrolment, which was introduced in 2012, so far has relatively low opt-out rates, at around 10 per cent.
However, the amount that employees and employers must pay into their pension as a percentage of earnings is rising, and experts fear that this may prompt a surge of opt-outs.
Currently the auto-enrolment minimum total contribution is 2 per cent – 1 per cent each from the employee and employer. From April 2018, the minimum total contribution will increase to 5 per cent, with the employee paying 3 per cent.
One year later, it will increase again to 8 per cent, with the worker paying 5 per cent.
AJ Bell is not the first company to have raised questions over the possibility of rising opt-out rates as auto-enrolment contributions rise.
Figures from Royal London, published last summer, suggest that a third of millennials could opt out of auto-enrolment when the contribution rises to eight per cent in 2019.
According to the Royal London survey, if total contribution increased to 5 per cent – with a 3 per cent contribution from the employer and a 2 per cent contribution from the employee -, nearly three quarters (74 per cent) said they would continue to save in their pension
But if the contribution is hiked to 8 per cent – five per cent for the employee and 3 per cent for the employer, then the number of millennials prepared to continue to save dropped to nearly two thirds (62 per cent).
Research from Aviva, back in December, also suggested that opt outs would rise. It showed that over a third of people haven’t decided yet if they will continue to save into a workplace pension after contributions to auto-enrolment increase in 2018/19.
The survey, which polled more than 2,000 private sector employees, also found that women are more undecided than men – 40 per cent and 29 per cent, respectively.
Overall, only 4 per cent of respondents said that they will leave the scheme they are in at the moment after 2019, while 12 per cent will consider that option.
Despite fears of an exodus from auto-enrolment experts have also said that, even with the rise to eight per cent contributions, this will still not be enough to allow people to save for an adequate retirement and that contributions must rise further.
Aviva has already called for minimum contributions to rise to 12.5 per cent by 2028.