Many of us glaze over at the mere mention of pensions but failing to save for the future is a fact one organisation is hoping to address. Pension Geeks is once again running Pension Awareness Day on 15th September 2019. With its quirky camper van tour, social media activity and mantra of ‘pensions don’t have to be boring’, the awareness day’s approach is definitely youthful, relevant and upbeat.
There are a number of different pensions on offer but the most well known – the ‘old age’ state pension issued by the Government is unlikely to sustain the kind of lifestyle many of us are accustomed to while in employment. At the other end of the spectrum, private pensions initiated by individuals have proved complex to understand and therefore slow to take up – especially among younger generations.
Workplace pensions were introduced to bridge the gap and provide for the future in a more effortless, automatic way. Over nine million workers are now involved in workplace pensions – a system where employees and employers both pay into a pension scheme set up by a company, and the Government also pays into the pot in the form of tax relief.
Changes to encourage more uptake
When workplace pensions were first introduced, an employee could decide whether they wanted to take part or not. Auto-enrolment was introduced in 2012 to increase participation, becoming a mandatory requirement for all eligble workers in 2018, and rules also changed to mean employees could only opt out after they had been enrolled in the first place.
Growing the nest egg
According to the Department for Work and Pensions, individuals saved an extra £6.9bn into workplace pensions in 2017-18 as a result of auto-enrolment – a figure expected to climb to £13.3bn during 2018-19 and reach nearly £20bn in 2019-2020.
Increasing contributions & opt out rates
So how do workplace pensions grow? In April 2018, the amount of money an employee was expected to contribute was raised from 1% to 3% of their wage, prompting fears of a higher opt out rate but this was not borne out. Analysis by Legal & General Investment Management actually discovered opt-out rates at workplace schemes it managed had not risen as anticipated.
We’re awaiting figures to see the impact of April 2019’s employee contribution hike from 3% to 5%, with analysts fearing Brexit uncertainty may also be a factor in more people leaving workplace pensions. In fact, recent figures quoted by Your Money estimate around a million people are anticipated to opt-out of auto-enrolment in 2019.
Trend watch: active discouragement
There is growing evidence that employers are actively discouraging employees from staying in their auto-enrollment schemes to save themselves money. In 2018, People Management magazine uncovered that the number of accusations made to the Pensions Regulator concerning employers attempting to get staff to opt out of their pensions had increased by 68%, potentially as a result of employer contributions also rising, which reached a new high of 3% in April this year.
The impact of rising employer contributions is especially being felt by SMEs. To put the squeeze in to context, a survey of 1,002 SMEs by Bibby last year found that 16% believed the costs of increased pension contributions would put a strain on their business, while 14% said they would have to freeze staff recruitment as a result.
The future of workplace pensions
Hargreaves Lansdown has floated the idea of retirement saving via workplace pensions becoming compulsory by removing the opt-out clause, while it additionally suggested that auto-enrolment may be extended to the self-employed. We’re also waiting to see if the new Prime Minister supports calls to increase employee contributions to workplace pensions to 8%, although an impending general election could consign this idea to the bin.
A new type of workplace pension, called a collection defined contribution (CDC), maybe arrive once Brexit is resolved. A CDC approach would allow individual pension contributions to be pooled into one fund and invested together for improved investment returns. The employer would still make contributions to CDC schemes on behalf of its employees but it would not be responsible for delivering the pension to members. Experts estimate it wouldn’t be until the mid 2020s until CDC pensions schemes become a viable, mainstream option but you can read more about the progress of CDC schemes here.