Average pension contributions fall as more low earners enrolled, says expert

The report, which was commissioned by the Department of Work and Pensions (DWP) as part of its ongoing "evaluation" of the auto-enrolment reforms, said that 13.9 million people were saving into a workplace pension scheme as of April 2014. The average amount saved per worker fell from £6,370 in 2012 to £4,673 in 2014, reflecting increased pension participation levels among the lowest earners in particular, according to industry experts.

"One would expect that contributions based on a small percentage of a low salary will be lower than the previous average level of contributions, and that average could conceivably drop further before the end of the initial implementation phase," said pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com.

"Automatic enrolment has resulted in large numbers of workers enrolled into pensions for the first time. While it is certainly important to focus on contributions, since these are one of the components that drive good member outcomes in DC [defined contribution pension schemes], the fact that contributions are low simply demonstrates that auto-enrolment is a long term project. Getting workers to contribute at all is, in some respects, part of the success story of the reforms," he said.

Auto-enrolment began for the largest employers on 1 October 2012, and 'staging dates' by which smaller companies will have to begin the process run until 2018. Under the programme, more than 1.3 million employers will have a legal duty to automatically enrol workers into a pension scheme which meets certain minimum requirements, and will be legally obliged to make contributions towards the pensions of those that do not opt out of the scheme.

The minimum contribution that must be made to a pension by both the employer and the employee once automatically enrolled will be phased in, rising to a minimum total contribution of 8% of earnings by October 2018. Of this, a minimum of 3% will have to be contributed by the employer. The current minimum contribution is 2%, of which 1% must come from the employer.

According to the report, more than 5.47 million workers had been automatically enrolled into workplace pension schemes by over 60,000 employers up to the end of September 2015. Many of these were enrolled into the government-backed National Employment Savings Trust (NEST), which had a membership of two million workers from 14,000 employers at the end of March 2015. Separate data published by the Pensions Regulator showed that 86% of employers enrolled their workers into DC schemes, and around 50% of those employers chose to use a multi-employer master trust rather than make their own pension arrangements.

The research found increased pension participation levels across all earnings bands and age groups. Pension participation amongst those earning between £10,000 and £20,000, which is just above the automatic enrolment earnings trigger, increased by the largest amount, 18%. The biggest percentage increase per age group was amongst those aged between 22 and 29, where participation increased by 19 percentage points to 60% in 2014.

The government is targeting an overall increase in workplace pension saving of between £14bn and £16bn a year by the time the reforms are fully in force. According to the report, the annual total amount saved in workplace pensions in 2014 was £80.3bn - and increase of £2.7bn on 2013's total, and which was largely driven by the private sector. Total pension contributions from the public sector actually fell by £500 million in 2014, according to the report.

The proportion of eligible savers experiencing some form of 'levelling down' by their employers rose slightly according to the research, from 6% before automatic enrolment was introduced to 8% in 2014. 'Levelling down' refers to employers reducing contributions or outcomes for existing pension scheme members in order to manage the cost of their pension scheme. Of those employers whose contribution costs will increase as a result of automatic enrolment, 81% have no plans to make changes to their existing pension scheme in order to absorb these costs, according to the 2015 Employers' Pension Provision Survey which was cited by the DWP in its report.

Up to the end of August 2015, 10% of automatically enrolled workers had 'opted out' of pension provision, while a further 3% of automatically enrolled workers had ceased active membership of their respective schemes. Young and low earning workers were more likely to opt out, according to the employer survey.