Auto-enrolment (AE) minimum contribution increases have not boosted opt outs but could be problematic for vulnerable workers, according to the Institute for Fiscal Studies (IFS).

A report drawn up by the group found that the pension participation rate of the least financially secure 3 per cent of eligible private sector workers is above 90 per cent, having risen since the mandatory minimum contribution level was increased to 5 per cent in the 2018-19 tax year.

IFS research showed that more than 90 per cent of individuals in the other four financial security groups are all also participating in workplace pensions, with participation having risen since before AE among all groups.

The IFS said this meant it was also reasonable to suppose that there was also no increase in opt-outs after the final increase in minimum contribution rates that happened in April 2019, when they rose to 8 per cent.

As such, the report stated that AE had been “broadly a big policy success” as it boosted private sector workplace pension saving from something two in five employees engaged in in 2012 to something four fifths of workers took part in in 2019.

However, it raised concerns that the increase in workplace pension membership from the least financially secure group was “potentially worrisome” as some of these individuals might instead benefit from higher take-home pay in order to “boost current consumption, save for a ‘rainy day fund’ or pay off costly debts”.

IFS noted that it was not clear whether these individuals were enrolled because they do not know they can opt out, they do not know how to, or they cannot be bothered for the amounts of extra take-home pay they would receive.

The organisation pointed out that, with the average gross earnings among the least financially secure group in 2018/19 sitting at £357 per week, ceasing pension contributions at 5 per cent of their gross qualifying earnings would give these individuals an average increase in take-home pay of around £12 per week.

The report concluded: “This is an issue that could become more salient over the coming months. Many are experiencing falls in earnings due to the public health response to the Covid-19 pandemic, while plummeting share prices and interest rates will also have led to lower incomes from savings and investments.

“The proportion of automatically enrolled employees who are financially vulnerable could therefore increase. One option for employees currently struggling financially is to temporarily leave their workplace pension scheme in favour of higher disposable income. But whether this is an option that individuals are aware of and choose to exercise remains to be seen.”

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