Auto-enrolment has been flaunting itself since 2012, with most UK employers (SMEs) being impacted from 2017. Auto-enrolment was introduced to encourage workplace pension savings and therefore reduce the reliance on state-paid benefits in retirement. It’s probably fair to say that most have not got a solid understanding of not only the how but the why.
For many employers auto-enrolment and pensions are just another thing on a very long list and therefore, it’s not really that important….. or is it?
Ok, so apart from it being a legal requirement for an employer to assess, enrol their eligible employees into a pension scheme and pay contributions for them along with issuing a significant amount of additional employee communications. Oh and apart from the fact that for non-compliance (with any of the requirements, not just all), fines and in some cases prison sentences can be handed out. – It’s worth pointing out here that in Q4 of 2017 some 8,000 fixed penalty notices were issued by The Pensions Regulator to non-compliant employers. Not to mention the escalating penalty notices – some of which have been into the tens of thousands of pounds. So apart from all that, it’s not important…… is it?
And this brings us to the why. On this one, I am in the fortunate position to have worked within the pensions sector for two decades, I have seen the landscape and priorities shift a number of times and the logic behind it. Many have not been as fortunate and therefore do not have the background associated with things such as auto-enrolment, it can just feel like a government forced company expense.
On average now, people can spend one-third of their life in retirement (around 8 years longer than in the 1980s). Potentially, that is one-third of their lives where they are not working and not earning a salary to pay for their ‘extended holiday’. This is an important point, in general terms, gone are the days of people knitting or just doing crosswords in their retirement. Retirement is very much now a well-earned active pursuit.
The work employees put in now, is key to giving them the best retirement possible. When you think about a pension, it is an annual income that is paid from the moment an individual retires to the date that they die. This, potentially, could be a very long time. There are now other options such as flexible withdrawal available but either way, this has to be paid for. The current state pension is around £8,000 per annum and could be less than this for some people. Will the state pension, at its current level still be available in the future, when we take into account an ageing population who are living longer and therefore the costs of providing a state pension continually increasing, who knows? But either way £8,000 per annum is not enough to live a quality life, and it is unrealistic to expect this to increase significantly.
So auto-enrolment is firmly in place, it is there to encourage saving for retirement and sets out the minimum contribution levels to be paid. The good news is around 84% of employees are now saving into a pension scheme in some form. However, the average savings per year have actually decreased. The contribution levels are low, they increased slightly in 2018 – although this increase saw a rise in the number of employees who opted out of pension savings altogether to over 8% – and are set to increase again in 2019 to a total minimum contribution rate of 8%. Auto-enrolment also does not yet capture the self-employed.
Based on an average salary of £26,000 per annum, this equals a pension contribution of £2,080 per annum. Royal London recently published some interesting statistics citing that in today’s terms, in order to get a pension of £9,000pa, an individual will need a fund value of at least £260,000 and even more if the individual rents their property – simply because that rent will not be paid off when the pension comes in, unlike most mortgages. It would take the £26,000 p/a person 125 years to save this amount!
It’s fair to assume that the minimum mandatory contribution levels are under further assessment, but we also need people to remain in the pension scheme for auto-enrolment to have the right effect and, ideally, pay more than the minimum. So there is a difficult balance to be struck.
So, whilst auto-enrolment is in no doubt a positive thing, there is a long way to go and this has to start with employers. Not only do employers need to ensure that they are meeting ALL the auto-enrolment compliance requirements to save themselves legal action and costs, they need to assess if they are supporting their staff enough and not just going through auto-enrolment on auto-pilot. This could be in the form of additional contributions, which, whilst attracting tax relief, is another expense – but it could be through other means – financial education, helping individuals to understand the significance and importance of retirement saving and encouraging them to ‘own it’.
Too many employers are doing the bare minimum. It may help employers to remember they are also employees. Investing in your employees leads to greater staff retention and feeling valued. There are a lot of positives to be had from encouraging financial education in the workplace.
Auto-enrolment provides a great opportunity to do this. To ensure the best options are in place for employer and employee. It should not be treated as just a tick box exercise. It is an opportunity to be part of an engagement revolution to help people get the best from and enjoy what they have worked for, long after they have hung up their employee hat.
Laura has over 20 years of experience in working with all employers and scheme types in the pensions sector
Through various administration, client management and project management roles
She is PRINCE 2 qualified project manager and has qualifications in the QPA and DiPMI
Laura now works focusing on member and employer engagement, delivering face to face training and education sessions.
She absolutely believes that it is so important for employers and employees to understand the pension scheme arrangements and what it means to them.
If you would like to know more about how Laura can turn you from a pension novice to a pension practitioner – please get in touch