Royal London dismisses fears of AE exodus after April contribution hike

Hannah Godfrey reports...

The approaching increase in automatic enrolment (AE) contributions this April is “highly unlikely” to lead to large numbers of people giving up saving into a workplace pension, Royal London has said.

The pension provider’s new policy paper What will be the impact of the April 2019 step-up in AE contribution rates? concluded that, despite the upcoming hike in employee contribution rates, the impact on pension scheme membership should be minimal.

Royal London said the increased contributions would be partly or fully offset for most people by pay rises and a more generous income tax system, which will see an above-inflation increase in the personal allowance for income tax and an above-inflation increase in the national living wage.

From 6 April 2019, the employer minimum contribution will increase from 2% to 3%. At the same time, employee minimum contributions will rise from 3% to 5%, meaning total minimum contributions will rise from 5% to 8%.

What happened last increase?

Royal London’s paper also looked at the effect of last April’s AE rise, from 2% overall to 5%. It found that in the period from April to June 2018, fewer than 6% of newly enrolled workers actively opted out of pension saving, which was actually lower than in the previous quarter.

At the same time, there was an increase among higher income groups who ceased pension saving – although Royal London suggested this was more to do with factors such as limits on pension tax relief for high earners, rather than a rise in contributions under AE.

Royal London provided the following example of a hypothetical worker earning £20,000 ayear going through the contribution increase. It shows that, even though the pension contribution rate increases from 3% gross to 5% gross, the worker still receives an increase in take-home pay in April.

Source: Royal London

Royal London director of policy Steve Webb (pictured) said: “The figures suggest good reason to be optimistic about the impact of the next step-up in contributions. A very timely increase in the tax-free personal allowance, plus a large rise in the national living wage, will all help to boost paypackets in April.

“For a typical worker who gets an average pay rise, we find that their take-home pay will still go up in April, even allowing for the increased pension contributions. The bigger challenge is likely to be getting those 8% total contributions up to more realistic levels in future.”