New research into FTSE350 companies' defined contribution pension plans shows that opt-out rates have remained very low amongst employees recruited after large firms began complying with automatic enrolment. However, as three quarters of employers offer matching contribution scales, employees who stick with the default enrolment position, rather than choosing to 'opt-up' to the maximum matching contribution level, could be missing out on a significant financial benefit.
There is plenty of evidence that opt-out rates were low amongst the existing workers put into pension schemes when the companies they work for first had to implement automatic enrolment. Towers Watson's FTSE350 Defined Contribution Pension Survey instead looked at opt-out rates amongst the new employees recruited since then – a period of more than two years for many large firms. The average opt-out rate amongst new employees was 6%; in three-quarters of cases, more than 90% of employees stayed in.
Will Aitken, a senior consultant at Towers Watson, said: "Some people starting new jobs would have joined the pension plan with or without automatic enrolment. Of the rest, some may have just been swept along by inertia, but many will be relieved that the problem of starting to save for retirement has been sorted out for them. Saving in a workplace pension is becoming the normal thing to do – an idea that the Government's 'I'm in' TV adverts tried to promote. Although some people may opt out when minimum contribution rates go up, very high pension participation is here to stay."
Towers Watson's research found that 74% of employers offer matching contribution designs. Under these designs, the more that an employee is prepared to contribute, the more they will get from their employer – up to a limit. Usually, matching contributions are offered on a £1 for £1 basis, but some employers offer more generous matches. This takes the average employer match to around £1.50 for every £1 that the employee contributes above the minimum they must pay to belong to the scheme.
Amongst FTSE100 employers, the maximum employer contribution available averages around 10% of pay. Will Aitken said: "The maximum contributions on offer have barely changed over the past four years but that will be academic if employees don't take advantage of them. The norm is for employers to automatically enrol new staff at the bottom of the matching scale, so employees only get more if they demonstrate that they are motivated by pensions by choosing to save more themselves. Even employees who don't opt out can therefore leave money on the table if they don't opt up. Typically, this means missing out on about 5% of pay – around £1,500 a year for someone earning £30,000.
"Of course, if all employees took full advantage of matching contributions, employers would have to find the money from somewhere. Many already budget for higher pension contributions than they are paying, but some might reconsider their pension offerings or hold down pay rises if they encountered big changes in employees' behaviour."
Previous Towers Watson research found that older employees are more likely to take full advantage of matching contributions, and this trend may be accentuated by the new pension freedoms for over-55s that are coming in from April. Will Aitken said: "If you're over 55, saving in a pension need not mean locking your money away for any time at all. If this makes pensions more attractive for older workers, matching designs could cost employers more than they do now."