Employers urged to 'sell' pensions to staff ahead of dramatic rise in minimum contributions

Employees must contribute at least 5 per cent by 2019, prompting fears many will quit auto-enrolment

Employers need to focus attention on forthcoming increases in minimum pension contribution levels or risk staff exiting schemes in large numbers, according to industry figures, amid concern about the low level of awareness of the legislative changes involved.

From April 2018, all employees enrolled in pension schemes must pay in a minimum of 3 per cent of their annual salary, with employers contributing 2 per cent. The current minimum levels are 1 per cent for both employers and employees.

A year later, in 2019, these levels jump again, to reach 5 per cent for employees and 3 per cent for employers.

But a survey from Now: Pensions suggests that 62 per cent of auto-enrolled employees are unaware of the increases. And new figures from Aviva have found that 4 per cent of employees have already decided to leave their scheme in April 2018, while a further one in eight (12 per cent) are actively considering doing so.

Nathan Long, head of corporate pensions research at Hargreaves Lansdown, told People Management it was important that employers ‘sell’ pensions to staff as an investment for their future, to avoid any danger of an exodus from company schemes.

“Employers should be painting pensions in a positive light; it’s a benefit for staff and they’re getting a big uplift on what they actually pay into their pension pot with tax relief and employers’ contributions,” said Long. “Although there will be less in employees’ pay packets in the present, they’re getting a good deal for the future.”

Overall participation in UK workplace pensions is around the 75 per cent mark, thanks to the success of auto-enrolment since its introduction in 2012, and there are fears this could begin to reverse if the increases are not carefully managed and communicated. But former pensions minister Steve Webb said there was also a danger in making the long-planned new levels sound too dramatic.

“It’s very important that the increase is communicated as the natural next step in making sure people are putting enough by for retirement,” said Webb, now director of policy at Royal London. “Employees need to see their employer is putting in extra and that if they were to opt out they would in effect be turning down a pay rise. But there is a risk of making too much of a song and dance of this step up.”

Charles Cotton, performance and reward adviser at the CIPD, emphasised the part HR professionals have to play in keeping employees engaged with pensions. “HR should stress that if employees opt out, they will probably have to work for longer before they are able to afford to retire,” he said. “This will throw up long-term issues for employers, such as rethinking performance management and development policies, job design, and pay and benefits.”

It is vital that employees understand and appreciate how the increase will positively affect their retirement savings, according to Adam Price, CEO of workplace financial advice provider VouchedFor. “Employees need to understand just how much better off they’ll be in the long term by contributing to a pension.”

Price acknowledged it is “human nature” to undervalue long-term benefits in favour of cash in the bank immediately, but said this should act as an incentive for employers to help staff “consider their specific life goals and how on track they are for them from their pension savings. That way, employees are more likely to build a balanced approach to managing their retirement savings.”

The increase in contributions will also prompt concern among employers that will have to make additional financial provisions. This has triggered fears that many will sacrifice other employee benefits to cover costs, or that there will be a rise in non-compliance.

“It’s up to employers to comply to the law around this,” said Kate Smith, head of pensions at Aegon. “If employers fail to do so, they will be reported to the Pensions Regulator and risk being fined. But employees who fail to [remain in their pension scheme] will lose the right to their employer’s pension contribution, and risk being left behind in the workplace from not having a sufficient enough pension pot to retire on.”