The introduction of automatic enrolment pension schemes in 2012 was a transformative move for the UK pensions industry. As a result, nearly 8 million people now save into workplace pensions via automatic enrolment, according to the Department of Work and Pensions.
However, the journey doesn’t stop here and there are challenges ahead for advisers and their clients.
Record numbers of people are saving into pension schemes for the first time, employer compliance levels are high and opt-out levels are significantly lower than expected. To meet the estimated savings requirements which allow pensioners to live comfortably through retirement, the Government plans to introduce increases to the minimum contributions (also known as ‘phasing’) from April 2018, a move that will see both members’ and employers’ pension contributions gradually increase.
The 1 per cent standard contribution from both employees and employers is expected to rise to 2 per cent for employers and 3 per cent for individuals, increasing further to 5 per cent for individuals in 2019, with employers making up the remainder to a minimum of 8 per cent.
While higher contributions might seem a sensible policy in light of the rising costs of living, their knock-on effects must be considered.
From a cost perspective, employers will need to factor the structural increase into their cost base and consider how this expense will feature in their financial forecasts. Phasing could potentially cause administrative challenges for firms as payroll systems will need to be adjusted. In addition, employers will be tasked with communicating the changes to employees to ensure they fully understand the importance of saving for retirement.
Potential for increased opt-outs
Naturally, increased contributions will put pressure on salaries which could likely encourage many to opt out of their current schemes. Opt-outs could have further consequences on retirement provision and result in admin chaos for firms that would be required to manage the process of opting out and later re-enrolments. An onslaught of opt-outs would be potentially problematic for firms, therefore they must devise methods to minimise numbers before the changes are introduced.
Following the success of the initial scheme, the Government has announced that it intends to review its eligibility criteria in efforts to encourage more people to save into a workplace pension. The review, expected later this year, aims to assess how to open up the scheme to lower paid workers and the self-employed. While employers who have a large body of workers earning below £10,000 a year will need to think hard about what the changes will mean for them financially, there could be some positive outcomes.
What happens post ‘phasing’?
Given the generally accepted consensus that even 8 per cent contributions are not enough to sustain comfortable lifestyles during retirement, it is likely that employers will be encouraged to incentivise workers to contribute more. There is currently no clear direction from policy makers about how to go about this. However, employers should be advised to monitor the issue closely. If employers are to voluntarily increase their contributions and offer workplace advice to their employees, they may enhance their reputation as an employer of choice.
There is much scope for businesses to improve their employee benefits in relation to pensions and this is an obvious opportunity for firms to use pensions as a means to increase employee engagement. This is crucial in light of the vast lack of member engagement across the pensions sector due to low visibility of savings, poor member understanding and access to advice, as well as the forgotten pension-pots.
The treasury plans to introduce a pension dashboard by 2019, an online tool which will allow members to actively engage with their pensions and increase pension visibility. Advisers have an important role to play at every stage of this process.
Patrick Heath-Lay is The People’s Pension chief executive