Workplace Pensions & the Auto-Enrolment Dilemma
Since the introduction of the UK’s auto-enrolment system for workplace pensions, the cost of saving up has become a dilemma for many. Below Lawyer Monthly hears from David Bird, Head of Proposition Development, LifeSight, Willis Towers Watson, on the issues behind this predicament.
The first workplace pensions were given to nurses in 1874 and we have come a long way since then. Schemes for civil servants, police and teachers followed in the 1890s. Of the 20th century industrialists, railway companies were the first to offer pensions, followed by businesses like Reuters and WH Smith. But it wasn’t until the post-war years that more companies started offering workplace pensions to retain skilled and managerial staff.
We are now looking to auto-enrolment, which ensures that employers provide and contribute towards a workplace scheme for all eligible members. This means that pension provision will be for everyone, rather than the few. In the last five years alone, an additional nine million people have been added to workplace pension schemes. But will the contribution rate raise that came into effect in April of this year, put this progress in jeopardy?
The benefits
The increase to auto-enrolment contributions – is the first step, with the next taking place on 5th April 2019 – is a welcome development as it begins the move towards reaching a higher level of pension savings for many, improving retirement incomes for millions. The first step is from 2% to 5% and next year they will rise again from 5% to 8%.
The change is particularly important in light of our recent research, which found that for over two-thirds (69%) of respondents, their workplace pension plan is the main way they are saving for retirement. In addition, recent statistics from the Department of Work and Pensions found that four in ten employees eligible for auto-enrolment are under-saving. But it is also clear that the rise has potential complications; will employees be able to afford the increase, or will they, in increasing numbers, choose to opt-out.
The pitfalls
For both employees and employers, the contribution rate rise will be a challenge. Employees especially, who face stagnant wages, rising credit card debt and unstable interest rates, will find the increase difficult. Some reports estimate that the rise could make pension saving a fifth of the average employee’s available spend from 2019 – a difficult situation for some workers who are already struggling financially.
The impact could be especially strong amongst young people, who are already pessimistic about saving enough for a comfortable retirement. Some argue that young people need to save as much as 18% of their earnings into a pension, which leads to the risk that younger workers, when faced with the choice between limiting their spend on luxuries or opting out of their pension, may choose the latter. If the hill is too steep to climb, why bother starting? Opting-out could be extremely harmful to their retirement savings, especially given that people are, on average, living and working for longer.
The solution
To stop potential opt-outs, it is crucial that employers help those thinking about leaving their scheme to understand the benefits of their pension scheme. This will help raise awareness of the changes that are expected and provide guidance to ensure they continue saving sufficiently for their retirement. By using digital tools that are easily accessible and engaging, along with jargon-free communications, employers will be able to improve engagement levels and ensure minimal opt-outs, despite the changing landscape.
The auto-enrolment contribution rate rise should not be viewed as a negative by scheme members. After all it can be viewed as a deferred pay rise as their employer will also be required to increase contributions. By ensuring scheme members remain engaged through the use of digital tools, employers and pension providers have the ability to show them that saving more is a positive development that will help them to retire comfortably when the time comes.
