Pension drive threatens to be too little, too late

Some 90,000 organisations north of the Border are preparing to meet their obligations to place employees either into their own defined contribution (DC) pension scheme or, where none exists, one designed for the purpose, such as Nest.

The rules, which took effect three years ago this week, apply to employees aged 22 and over, employed for at least three months, earning over £10,000 a year, eligible to work in the UK and who don’t already belong to a scheme. Those enrolled by their employer have the right to opt out and be repaid any contributions taken from their salary.

With the staging date for employers with fewer than 50 workers running from June 2015 to April 2017, hundreds of thousands of small firms across the UK are under pressure to enrol employees or face fines.

Charles Counsell, executive director of automatic enrolment at The Pensions Regulator said: “We are now approaching three years since the start of automatic enrolment and it has been a success – saving for a pension in the workplace is now the norm. Now employees in small and micro businesses will get the opportunity to save for their retirement.”

The response to automatic enrolment has been mixed. While the opt-outs have been lower than feared – around 10 per cent of eligible employees – the level of contributions into pensions has plunged by almost 50 per cent.

The average amount paid (by employees and employers) into workplace pension schemes fell from 9.1 per cent of salary in 2013 to 4.7 per cent last year, according to the Office for National Statistics.

This is due to the low contribution levels in the early years of automatic enrolment, set at a minimum of 2 per cent of salary (including employee and employer contributions, plus tax relief). This will rise to 5 per cent in October 2017 and 8 per cent a year later, but the recent fall suggests many employers have taken the opportunity to “level down”.

Alison Fleming, head of pensions at PwC in Scotland, said: “More people are saving but the average rate of savings is lower. Over the next few years the average contribution is expected to increase as the minimum level of required auto-enrolment contributions changes in 2017 and again in 2018.”

People at large organisations that were eligible for automatic enrolment from the outset in October 2012 will now be re-enrolled if they had opted out or are no longer active members of their scheme.

Those who opted out three years ago have collectively missed out on £350m of pension savings, Nest research shows, including £35m of tax relief and £170m in employer contributions.

Helen Dean, chief executive at Nest, said: “This is the time for those who opted out, stopped saving, or who are just about to be enrolled for the first time, to ask themselves, ‘Do I really want to walk away from this money?’”

But even those who do re-enrol could be left with pension shortfalls in retirement if they don’t pay enough into their scheme.

The average employee in Scotland is setting aside just 5 per cent of their pay towards retirement, while the average employer contributes 6 per cent, according to a new PwC report. The average worker north of the Border hopes for an annual retirement income of £19,872, the survey found. But someone who starts work today aged 22 will need to put aside 15 per cent of their annual salary to achieve that target, said PwC. Maintaining the current 5 per cent contribution level would leave them £4,000 a year short.

“Our research shows a real disconnect between people’s pension pot expectations and what they are putting into the system,” said Fleming. “In short, the majority simply aren’t contributing enough and more often than not this is down to a basic lack of understanding of the system.”

Almost half of respondents in Scotland said the complexity of the pension system was the main reason they don’t save more for retirement.

“If we are to incentivise people to invest their hard-earned money into their pension, then the system needs to not only be much simpler to understand but trustworthy and sustainable,” Fleming added.

Some people will also miss out on higher pension contributions because they either don’t qualify for automatic enrolment, or their employer doesn’t offer a scheme.

More than one in four UK firms with fewer than 50 employees, and which will soon have a legal duty to comply with the automatic enrolment rules, risk missing their staging date because they are unaware of it or don’t know what they must do.

The research, by payroll specialist Moorepay, also found that more than half of the small firms that are 
aware of the requirements still don’t have a pension provider lined up.

Meanwhile many people who could benefit from automatic enrolment are missing out because they aren’t eligible. While more than five million people have been automatically placed into a workplace pension since 2012, one in three female employees – many who act as carers or work part-time – fall below the £10,000 earnings threshold for inclusion, according to the Pensions Policy Institute.