Auto enrolment: Opt-Outs and Opt-Downs

Pensions auto enrolment began in 2012, and has been a notable success with more than nine million employees now enrolled and saving towards their retirement. Yet since the start of the exercise the legal minimum contributions payable by both employer and employee have remained very low indeed. This fact may partially explain why the numbers of employees opting-out (or later leaving) a pension scheme has also been much lower than politicians and some industry commentators were initially expecting.

But this situation may be about to change. The minimum level of auto enrolment pension contributions allowed by the legislation increased last month, and will increase further on the 6th April 2019. For some employers this will mean a trebling of their contribution costs in just over 12 months. Employees will also see their contributions increase from 1% last tax year to 5% in 2019/2020. So will this marked increase result in more workers struggling to make payments and deciding to cease pension savings?

Why does this matter to employers? The impact of auto enrolment opt-outs

A few employers may be rather relaxed about an increased number of pension scheme opt-outs, given that the employer will avoid a contribution cost as a result of the employee’s decision. Yet more far-sighted organisations will understand that the decision not to join essentially equates to the employee waiving part of their remuneration package. Such a decision may have consequences in terms of employee engagement, productivity, and staff retention.

So this is actually an issue which all UK employers should take seriously. But where to start, and which groupings of employees are most likely to be effected by the increases in minimum pension contributions?

What is the makeup of your pension scheme?

The impact on any given workforce is likely to vary greatly depending on the profile of the workers, and also of the pension offering itself. Broadly employees will fall into one of three categories for this exercise:

Employees enrolled in a high quality pension scheme:
Many organisations offer a pension contribution structure that is significantly better than the minimum levels prescribed by legislation. The statutory increases mentioned above are therefore unlikely to apply to such employees, so this change will present no challenge to the affordability of contributions for this grouping.

Employees enrolled in a scheme on a “minimum” contribution basis:
This second grouping is more exposed to the change as they will see higher pension deductions from their take home pay over the next few months.

Yet the increased level of 2018 is not massively higher than that of last year, and this phasing approach means that the increases to the new employee contribution level in 2019 might still be acceptable to many. So it is likely that only those employees who are genuinely struggling to make ends meet in this grouping will look to opt-out from pension savings.

Employees being enrolled for the first time:
This leaves one final grouping, those employees who have only just met the auto enrolment criteria. Examples of this would include reaching age 22, joining a new employer, or being re-enrolled following an earlier departure from the scheme.

This grouping is perhaps the most exposed to the contribution increases, as unlike the groups above they will not have the option of commencing contribution at a low level, followed by gradual increases to the statutory minimums now required. So the immediate impact of the full contribution cost on take home pay might well be significant, and could therefore result in more such workers avoiding pension savings.

What about Opting-Down?

One possible solution to the above affordability issue has recently been voiced in the national media. The suggested approach is to allow workers to “opt-down” to a pension contribution level that is lower than the minimums prescribed in the auto enrolment rules.

Whilst this may seem like an attractive solution to the issue, it should be noted that the employer will no longer be legally obliged to make a company contribution. Missing out on the employer contributions could badly damage the employee’s pension outcomes at retirement, so this option should be treated with caution.

Some employers may of course seek to take a pragmatic stance on this issue, and offer to make payments regardless of the worker’s personal contribution level anyway. Such an approach is laudable, but should be carefully considered to ensure that such actions do not create administrative issues or an unworkable precedent for the future.

Finally, and not least, employers would need to be careful that they are not seen to encourage opting-down, and The Pensions Regulator has been voicing some concerns about this very issue recently as well. So we would strongly encourage employers to review such a decision with caution, and to take advice as needed.

Where do higher pension contribution rates leave your business?

It remains to be seen if the higher contribution rates will result in a marked increase in those leaving workplace pension schemes. It is however worth noting that those employees that do opt-out of such schemes will still be subject to re-enrolment by their employer every three years. It is therefore likely that any short-term decrease in pension membership numbers now will be corrected over time.

For more information on Pensions Auto Enrolment please speak to our Workplace Pensions Team.


Steve Herbert is Head of Benefits Strategy at Jelf