Since the introduction of auto-enrolment, the number of people saving into workplace pensions has increased dramatically. Moreover, the amounts being saved are slowly rising with a final push, to 8% of earnings, due in April this year. As Jamie Jenkins, Head of (Global) Savings Policy at Standard Life Aberdeen, reports, employers should not only be prepared, but be taking the opportunity to highlight the value of pension savings with employees.
Since its introduction only seven years ago, auto-enrolment has been transformational for retirement savings in the UK.
With over 10 million people now auto-enrolled, employee participation in workplace pensions has improved dramatically from less than 50% to around 80%.
Getting pension contributions up to a more adequate level
By February of last year, the initial staging of auto-enrolment had been rolled out across the UK. Every employer, depending on size of firm, had been given a ‘staging date’ from when their auto-enrolment duties came into force. This was only the beginning, however.
When auto-enrolment first became law, the Government allowed a phasing of minimum contribution rates to let employers and employees build up to higher saving levels gradually.
April 2018 saw the introduction of this first round of phasing, when the minimum monthly pension contribution rate rose from 2% of qualifying earnings to a total of 5% of qualifying earnings, with a minimum 2% contribution from the employer.
The second round of phasing this April marks one last push for employers in terms of getting workers to pay more into their pension, and get contributions up to a more adequate level, especially for those who are auto-enrolled at the statutory minimum contribution rate. It will see an increase in required contributions to a total of 8% of qualifying earnings, with a statutory minimum contribution of 3% from the employer.
If employers are already contributing above these levels, they don’t need to do anything further. But it’s vital to know that the minimum employer contributions required from 6 April 2019 will vary depending on:
- the type of scheme
- the rules of the scheme
- the definition of pensionable pay used
Many firms have already started to prepare for the contribution increases
Most employers will have already taken the steps required in preparation for this second round of phasing including recertifying their pension scheme. For more information about getting ready, take a look at www.standardlifeworkplace.co.uk/phasing.
Employers should now be informing employees about the increases to minimum contributions but it is also a great opportunity to remind them about the value of their workplace pension.
The key message to employees, of course, especially with the rise in employers’ minimum contributions, is to stay in the workplace pension scheme. If employees can afford the increase in their minimum contributions, they should be encouraged to stick with it. Few people look back and regret having saved for retirement.
Businesses should also be presenting information about pensions and the benefits of a workplace scheme in ways that encourage interest. This is especially true for young employees at the beginning of their pension savings journey because they have decades of working in front of them before they retire.
The distinct benefits of the UK workplace pension
Although people can choose to opt out of a pension scheme after being auto-enrolled, only one in ten have chosen to do so. Auto-enrolment nudges people into saving and embraces their inertia, a strategy that has so far proved very successful.
However, inertia does not breed engagement and employers will ideally communicate with their workforce to help them understand that if they do choose to opt out, they will lose the very valuable financial contribution their employer makes to their pension, especially with the employer contribution rate about to rise.
Another distinct benefit of a workplace pension scheme in the UK is the tax relief on pension savings. For a basic rate taxpayer, every 80p paid in is topped up to £1 (rates differ in Scotland) once the tax relief is added.
There should be some sort of balance with contributions
Whether the balance between the statutory minimum employer and employee contribution is right is an interesting debate for the future, as is the argument whether contributions should increase at some point above the 8% minimum.
There are some who will argue that employers should be paying more and some who will argue that employer and employee contributions should be equal. The reality is that if you look around the world, there are various examples of different models. In Australia, employers contribute a mandatory 9.5% of monthly salary, and rising. In Chile, it is mandatory for employees to contribute 10% of their own monthly salary.
Of course, those people who are earning significantly more than the minimum wage would probably want to save more than the minimum set by auto-enrolment, but it’s obviously a different story for everyone depending on what their earnings and circumstances are.
Auto-enrolment has been an extremely successful initiative
Since its launch in 2012, auto-enrolment has been extremely successful in getting people to save into a pension. Other countries around the world have taken note of how effective it has been and many are looking to replicate it.
Now, we’ve all got a role to play in helping employees understand the value of their pension savings, from employers to the Government, and from providers to the rest of the pensions industry.
For more information about the steps to be taken to prepare for the second round of auto-enrolment phasing, go to: www.standardlifeworkplace.co.uk/phasing
Jamie Jenkins is Head of (Global) Savings Policy at Standard Life Aberdeen
The views expressed in this blog should not be regarded as financial advice. It’s important to remember that a pension is a long-term investment and as such its value can go down as well as up. It could even be worth less than was paid.