Opt out, shmopt out…

At the outset of automatic enrolment, many soothsayers suggested up to 30% of people would opt out, and that this would be particularly true of younger employees.

Thus far, neither has proved to be true.

The DWP’s recent review suggested that opt out rates over the first few months of automatic enrolment are 9%, on average. Higher rates have been recorded amongst the over 50s, but surprisingly, opt out rates amongst under 30s are even lower at around 8%.

Even where an employer’s opt out rates have been reported as higher than this, it generally reflects a small population of people who were not previously in the pension scheme. So, in some cases, we’ve heard about 40% opt outs, but taken in the round, scheme participation has increased from the high 80%s to the mid-90%s. That’s pretty much optimal participation, I’d say.

Opt out rates are crucial for the success of automatic enrolment, on a number of counts:

  • First, if no-one stays in, the whole thing would be a failure. Obviously.
  • Second, if opt outs were similar to predictions, this significant minority would be sufficient to drive ‘I told you so’ stories, which damages confidence in the system.
  • Third, the more opt outs there are, the more administration there is for the employer, adviser and provider, pushing up costs for everyone.

This last point is important. Employers need to be modelling contribution costs on a realistic basis, but if they revise those opt out rates down (based upon the research so far), they could at least bank some administration savings along the way. And maybe even factor in greater engagement with employees in the benefits on offer.

We shouldn’t be complacent of course. The largest employers have greater resources and generally already have a significant number of employees in a pension scheme. In many cases, their contribution rates will also be more generous. But it’s a very positive start, nonetheless, and we should seek to capitalise on this ‘good news story’ as we work through the staging dates for smaller employers.

It would be interesting to get some views on why, perhaps, we are seeing less younger people opt out than predicted. Have the youth of today just become more financially savvy?

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