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Defined Contribution

Concerns of higher opt-out rates follow U.K. auto-enrollment contribution increases

The planned increase in automatic enrollment contributions in the U.K., while welcomed by the industry, may lead to younger participants opting out of corporate plans.

Effective Friday, U.K. employees must contribute a minimum of 3% of salary, up from 1%. Employers must add a minimum 2%, up from 1% previously. Starting in April 2019, that will rise again as participants must contribute at least 5% and employers, 3%.

Still, consultants warned they are not enough to provide sufficient incomes in retirement — and the increases may also discourage younger participants from contributing altogether.

"Today's planned increase to auto-enrollment contributions is welcome as it begins the move toward reaching a higher level of pension savings for many, which will improve retirement incomes for millions of future retirees," said David Bird, head of proposition development at LifeSight, Willis Towers Watson's multiemployer plan, in a comment.

However, Mr. Bird acknowledged that the increase is "challenging for both employees and employers," and cited reports stating the increase could take one-fifth of the average employee's available disposable income starting next year. He said that is "a difficult situation for workers who are already struggling."

Mr. Bird said the risk is that employees, younger workers in particular, "may opt out of workplace pension schemes altogether. This could be harmful to their retirement savings, especially given that people are, on average, working for longer. It is crucial that employers help those thinking about opting out to understand the benefits, using easily accessible, jargon-free communications. This will help raise awareness of the changes that are expected and provide guidance to ensure they continue saving sufficiently for their retirement."

The increase in contributions "will not be the panacea the government hopes it will be," added Maria Nazarova-Doyle, head of defined contribution investment consulting at JLT Employee Benefits, in a separate comment. "Whilst greater retirement savings are to be universally encouraged, the benefits of the increase will be eroded significantly if it is not accompanied by a review of the default investment strategy of a DC pension scheme," she said.

Ms. Nazarova-Doyle added that research by the consultant showed losses from being enrolled into a "poor-quality default fund negates much of the progress made by increasing contributions for a saver starting from scratch … the importance of choosing a good quality default strategy cannot be overestimated."