The rising auto-enrolment contribution rates next week, and in April 2019, are not likely to prompt a “significant negative behavioural response”, Nest Insight has claimed.
According to a new research paper from Nest Insight executive director Will Sandbrook, consumers’ elasticity in response to changes in contribution rates is generally low, therefore rate increases tend not to result in a negative response.
While a modest opt-out rate rise is expected when these changes are implemented, Nest has outlined three key cases that justifies its optimism towards the auto-enrolment phasing process.
Sandbrook referred to the Save More Tomorrow programme, where employees can commit to increased contributions now, while feeling the impact later, for example increasing contributions with pay rises. In original studies around this it was found that the majority of employees remained enrolled through all four scheduled contribution increases and none of those who withdrew from the programme reduced their contributions back to pre-programme levels.
Additionally, studies in the US with 401(k) retirement plans found that through increasing default contributions, higher overall contribution rates were achieved until much higher contribution levels were reached.
A third case study involved a field experiment with large UK employer ICI prior to the introduction of auto-enrolment. Workers were automatically enrolled into a defined contribution scheme with a pre-defined range of contribution offers. Of those enrolled, new joiners to the organisation’s opt-out rates remained unchanged following the increase, at around 10 per cent and a further 10 per cent of people opted to reduce their rates from the default level.
“These findings give rise to legitimate confidence about likely reactions to increases in contributions under auto-enrolment. We’re certainly among those who expect phasing to be successful. But, our expectations for what success looks like needs to be reasonable,” Sandbrook stated.
“This evidence suggests that auto-escalation leads to higher contributions, as does being enrolled at a higher initial default contribution rate. Nothing in the evidence presented here suggests that we should expect to see large shifts in behaviour in response to phasing.”
Further to this, Nest noted that with the upcoming rate rises, the actual take-home pay impact for people at the point of the contribution rise will be fairly modest.
Overall, it is also highlighted that while some may choose not to be part of their workplace auto-enrolment scheme when contributions rise, there are still safeguards which requires mandatory enrolment. This, coupled with job churn, means that those who cease or opt-out will be enrolled again in years to come, Nest noted.
“With mandatory re-enrolment and the natural re-enrolment created by job churn, it will take some time before the ‘true’ rate of opt-out and participation arising from auto-enrolment is known. Until then, we have every reason to be optimistic,” Sandbrook concluded.
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