DWP report backs up the theory that inertia is strong enough to overcome the impact on pay of increasing contributions
Last year was full of developments in the pensions world. Defined benefit consolidation, collective defined contribution schemes and the pension dashboards were all the subject of government consultation and policy development.
But perhaps the most important Department for Work and Pensions publication of 2018 came right at the very end – exactly a year to the day after the publication of the 2017 automatic enrolment review.
The 2018 auto-enrolment evaluation report is important for a number of reasons.
This might seem a pretty big claim for what is largely a technical, statistical report updated each year, designed to monitor what is happening. Yet this evaluation has, for the first time, been able to shed light on some of the areas of auto-enrolment where we have previously been relying on theory rather than evidence.
I am talking about the number of people who stop saving in a pension they have been auto-enrolled into.
However, what we have had much less information about until now is how many people stop making contributions in the months after they start to pay in.
Technically, this is known as cessation and has the potential to undermine auto-enrolment even if opt-out rates remain remarkably low. Without knowing how many people stop saving – and why – it is hard to understand how they might react to different policy changes, such as increasing contribution rates, or starting to pay contributions from the first £1 of earnings.
So a lot of emphasis was placed on finding out whether people stopped saving once they had begun and if this behaviour changed once contributions paid by individuals started to increase from April 2018.
In theory, we have always thought inertia was strong enough to overcome the impact on take-home pay of increasing individual pension contributions. But until now, we have not had the hard evidence to give us comfort that this is correct.
The 2018 evaluation contains new evidence taken from employer tax records, which tracks individuals over time, so we can see who continues to make contributions once they have been enrolled and who stops.
Importantly, we can also see some information that tells us why contributions have stopped.
This is important, as someone stopping due to a move to a new employer has different connotations to someone stopping because they have actively chosen to.
The evidence is reassuring. Although this data is not directly comparable with the headline opt-out rates for a number of technical reasons, there are some very clear trends. The most important is that there has been very little change in the number of individuals making an active decision not to save in a pension – either through opting out or cessation – throughout the period monitored since 2014.
The rate for the period April to June 2018 was 0.7 per cent, while in the four years before this the average rate was 0.6 per cent.
Although around 2.5 per cent typically stop saving each month, more than two thirds are due to employment changes (either new jobs or becoming ineligible for a pension contribution in existing employment).
There are a couple of important implications from this evidence. Firstly, it suggests the first phased contribution increase in April 2018 has so far not led to any change in savings behaviour around auto-enrolment. I say so far, as the data only covers the first two to three months after the change, so there may be a longer-term impact not yet picked up.
The second is that people changing jobs and employment conditions have a much larger impact on pension saving than people choosing to stop saving.
So policies that look at who is eligible for auto-enrolment (such as looking at the earnings thresholds) and managing multiple pots (such as pension dashboards and small pot issues) remain important parts of the auto-enrolment landscape.
While the latest data is not perfect, and does not answer every question, the evaluation report represents another positive step forward for the implementation of auto-enrolment, and highlights once again the power of inertia.
Chris Curry is director of the Pensions Policy Institute and co-chair of the 2017 automatic enrolment review