25th September 2015
Auto-enrolment has encouraged more people into pensions but the value of contributions has halved.
As the third anniversary of auto-enrolment approaches, active membership of occupational pensions has increased by over 2 million. While this is a great achievement for the auto-enrolment scheme, which automatically puts workers into workplace pensions with the option to opt-out if they choose, there is concern about the level of contributions being made.
Average contributions into defined contributions schemes, which the vast majority of workplaces operate, has fallen from 9.1% of earnings to just 4.7%.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the cut in contribution levels was worrying.
‘The increase in membership has clearly been driven by auto-enrolment,’ he said. ‘The decline in average contributions looks worrying, however membership of private sector defined contribution pensions has shot up from just 1.2 million to 3.2 million in one year.
‘The vast majority of these new members will have been enrolled at the minimum statutory contribution rate of 2% of earnings. This means the decline in the average is probably attributable to the diluting effect of these new members, rather than a cutting of contributions for existing scheme members. Nevertheless it is vital that contributions increase above the 8% minimum they will reach in 2018.’
McPhail compared the average defined contribution pension saving against the average level of defined benefit contribution, which is 20.9%, to highlight the stark difference.
Defined benefit schemes are rare these days as the burden is on the employer to pay a set retirement income based on a multiple of years worked and a percentage of final salary. This compared to defined contribution pensions where the individual retires with a pot of money that is determined by how much is saved and the performance of the stockmarket.
‘It is also worth noting that active membership of private sector defined benefit schemes is now down to just 600,000 lucky individuals; this compares with 3.7 million in the public sector.’