Workplace Pensions – a burden or a benefit?

5 February 2018

The Pensions Regulator’s 2017 report on the progress of the workplace pension/auto-enrolment scheme, introduced in 2012, is very positive. There are signs that employers are coping very well with the scheme and take-up rates among employees are high. Several reports prepared by large institutions in the pensions industry are a little more cautious. There is still work to be done both with employers and employees before we can say that the problem of poverty in retirement has been dealt with.

According to The Pensions Regulator, between 2012 and 2017 the proportion of eligible employees enrolled in workplace pensions rose from 55% to 78%. This increase occurred largely in the private sector among SMEs; whilst the public sector and large employers were to a large extent already providing suitable pension schemes. At the last count the total number of employees enrolled was 7,650,000 with some smaller employers not yet having reached their staging date. The total amount invested in workplace schemes in 2016 was £87.1bn (£3.8bn more than in 2015). Most employers stated that implementing the scheme was less onerous than anticipated.

Encouraging progress has no doubt been achieved. However, True Potential, a group of financial services and technology companies, in its report for the third quarter of 2017, said that an income of £23,000 is needed annually in retirement to live comfortably. Based on actual savings behaviour however, people in the UK are on course to receive an income of just £6,000 per year from their retirement fund. A significant proportion of the population are apparently unwilling or unable to plan for their long-term financial needs. True Potential’s survey found that 45 per cent of respondents paid nothing into pension pots in the last quarter. Those least interested in pensions savings were in the 45 to 54 age bracket (47%), followed by 18 to 24 year-olds (44%). People aged 24 to 35 saved the most, with an average of £239 in the period – although a third of this group saved nothing for retirement.  The average amount paid by an individual into a pension funds in the last three months was £203, whilst amounts paid into other types of savings was £353.

With pension contributions set to rise in April, Aviva, in their latest report ’Working Lives’, explored attitudes to savings and found that only 4% were planning to opt out of their workplace scheme, although 12% said that they would consider leaving and only 50% said that they would definitely stay in. Of much more concern was the lack of understanding of finance generally and pensions more specifically among the workforce. Two out of every five employees were confident that their workplace contribution would provide a fund sufficient for them to live on in retirement. 12% thought that it would provide them with enough money to live comfortably. Sadly, this confidence is almost certainly misplaced, a conclusion reinforced by the fact that 31% of those surveyed trusted themselves in preference to a financial adviser when it comes to planning long-term savings. In fact, a quarter of employees, approximately 6.6m private sector employees, did not know what their auto-enrolment pension contributions would provide at their retirement date.

When asked to list employment benefits in order of importance, employees said that holiday allowance (46%) and flexible working hours (33%) were more desirable than pension contributions (24%). Nevertheless, 11% of employees said that they might consider changing job to get better pension benefits.

At the moment the minimum workplace pension contribution is 2% of salary (1% contributed by the employer). Next April this will rise to 5% (of which 2% will be paid by the employer). Aviva’s survey sampled the views of employers and found that more than half (54%) of businesses thought that the increases would not have any impact on them. This includes 29% who are already contributing more than the increased amount. Some companies thought that future pay rises might be affected, but only 9% contemplated staff reductions as a result of the additional cost. Employers were also asked if they were concerned about whether their employees could afford to retire; two-thirds were slightly or very concerned about this.

As I have mentioned in previous blogs, recruitment is currently difficult and staff retention is therefore important. Not only that but workplace pension contributions will rise next April and again in 2019, reaching 8% (of which the employer will pay at least 3%).

There is no doubt that auto-enrolment has so far been a success in persuading employees to save for their retirement, and that up to now employers have generally coped well with the costs and the administration. But Aviva’s survey sends another important message: in order to prevent their best staff from going to work for their competitors, employers need to offer flexible working hours and generous holiday entitlement. They should also recognise that pension benefits are increasingly important, in spite of the fact that many employees do not understand their value. It seems that businesses could improve their employment offering by providing free financial and retirement-planning advice (subject to all the relevant regulations of course).

If you have any concerns about the increasing costs of workplace pensions, or about staff recruitment and retention, why not give me a call or contact one of your local UHY advisers to discuss your options?

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