Workplace pensions clear first big hurdle – but the there's another one just around the corner

A rise in the amount we all contribute hasn’t hurt the number of people saving into workplace pensions.

It’s now six years since the Government began phasing in auto-enrolment, its workplace pension scheme which sees employers legally required to open a pension on behalf of their employees – and contribute to it.

It’s made a big difference too, with around 9.88 million people enrolled into pension schemes as a result, pushing them into building a pension pot which will help ensure they are not entirely reliant on the state pension when they retire.

Inevitably with a scheme like this, the Government adopted a softly, softly approach, starting out with very small compulsory contribution levels.

But those contribution levels are rising, posing the next big test for workplace pensions.

Saving into a workplace pension: all you need to know

As contributions rise, won’t opt-outs as well?

The fear with workplace pensions has always been that, as contribution levels are increased, employees will be more likely to notice the money disappearing from their pay packets and actively opt out.

When the scheme was first launched, employees only had to pay in 1% of their salary, which was then topped up by another 1% from their bosses.

Let’s be honest, many of us wouldn’t notice that, especially as it is taken from our gross, rather than net, salary.

However, from last April that minimum contribution level for employees tripled to 3%, with a further 2% coming from the employer.

That’s a figure more likely to catch the attention of employees, especially those already struggling with stretched budgets.

But the initial data suggests that the result hasn’t been for employees to drop out of the scheme.

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Sticking with saving

The Pensions and Lifetime Savings Association collects data from the big providers of workplace pensions, the likes of NOW: Pensions, NEST and the People’s Pension.

And according to its latest figures, there was only the slightest change in the number of people saving into a workplace pension after the increase in minimum contributions.

It found that in the three-month period between January and March, the average proportion of members who stopped saving into a workplace pension stood at 3.3%.

In the three months following the contribution increase, this crept up to 3.5%.

This figure will include people who stopped saving because they moved job or because their employer switched providers – it won’t simply be down to the change in contributions.

Now, there is still plenty of time for savers to start to feel the difference in their pay packets and decide to opt out, but it’s a really positive start.

It’s worth noting that this relatively small change in contribution levels could make a sizeable difference to the size of a person’s pension pot when they decide to retire.

Nigel Peaple, director of policy & research at the PLSA said: “This year’s increase could mean someone on average earnings ends up with a pension pot of £80,000 instead of £32,000.

With small numbers making such a big difference, and many people saving for the first time, it’s vital industry and Government continue to work together to sustain savers’ confidence in pensions and help people achieve the retirement they want.”

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There’s another test still to come

While workplace pensions have cleared this first real test, there is a bigger one to come next year when contribution levels rise once more.

From April 2019, employees will need to pay in 5% of their monthly gross salary, with another 3% coming from their bosses.

Let’s be clear – this is a good thing.

Getting people saving something for their retirement has been a worthy achievement, but putting aside 1% of your salary every month isn’t exactly going to lead to a comfortable retirement.

But 5% is going to be far more noticeable, so there remain some concerns that this may be the point at which employees decide to step back from workplace pensions.

The value of a workplace pension fund

So if you were enrolled in a workplace pension from the start, how much is that now worth?

According to calculations by Aegon, an employee on the average income who was auto-enrolled in October 2012 and has stuck to the minimum contributions will likely now have a pot worth £3,353, having only paid in £1,099 of their own money.

If they stick with the minimum contributions then this will jump to £16,251 over the next six years.

Of course, this makes a few assumptions when it comes to investment returns, but it’s a decent insight into just what a difference relatively small contributions can make when it comes to building a decent pension pot.