Amid the financial pressures facing employees as a result of the pandemic, pensions experts are calling for reforms to auto-enrolment to ensure low-paid workers who stop paying into pensions do not lose out on employer contributions. People Management takes a look at the pros and cons of such a move, what this would mean cost-wise for employers (and admin-wise for HR), and how likely change is.
What's been proposed?
This week, wealth management company Quilter called on the government to allow low earners who opt out of auto-enrolment to still receive their employer pension contributions of at least three per cent of their salary. This should apply to people on a salary up to £17,500, the company said. As things stand, employers only have to make contributions if their employees are paying into a workplace pension.
More than one in 10 eligible employees choose not to contribute to a workplace pension, according to figures released by the Department for Work and Pensions (DWP) in June this year. Those earning less than £20,000 are the least likely to be taking part in a scheme, with just 81 per cent making contributions.
The proposals are also being backed by the Investing and Saving Alliance (TISA). Renny Biggins, the organisation’s head of retirement, comments that it may be appropriate for low-paid workers to “opt out until finances improve and they are able to recommence retirement saving”. However, they “should not be excluded from the benefit of an employer contribution – they need this benefit the most and the framework should not fail this cohort,” he says.
He adds: “We propose the concept of an additional earnings threshold, where those who earn under it can opt out from a personal contribution with the continuance of the employer contribution. The level of this threshold can be reviewed on an annual basis and is a needed addition to the current framework.”
Mark Futcher, partner at Barnett Waddingham, says he would welcome such a change. “I’d also argue this could be a rule that any individual could invoke for a period of, say, up to 12 months,” he says. “It may be that they are able to do this once or twice in their working careers. This could help at other financially stressed times.”
What would the benefits be?
Hundreds of thousands of low-paid workers who have been furloughed and seen their incomes slashed by 20 per cent could benefit from a ‘pensions holiday’ where they get back the part of their salary that was being paid in contributions. They would then not be penalised by losing the contribution their employers had been making.
Jon Greer, head of retirement policy at Quilter, says: “Facilitating a partial opt-in for lower earners would mean they could at least save something if they felt they had to cease contributing themselves due to affordability. As people come under financial pressure, there is a temptation to opt out of pension saving. A partial opt-in would offer them a halfway house.”
“This would clearly benefit lower-paid employees and employees who are suffering from temporary financial hardship,” says Stephanie Windsor, chartered financial planner and partner at One Pension Consultancy, adding: “Reforming the automatic enrolment rules and allowing employees to partially opt in would be a welcome change – if only for this period when so many are impacted by Covid.”
Research released by Canada Life last week revealed that one in 10 employees paused pension contributions during lockdown and a further 13 per cent are considering doing so.
And a report by Royal London last month warned that 40 per cent of 18-34-year olds have stopped or cut back on pension saving during the pandemic.
What could the drawbacks be for employers?
Change would come at a cost to companies. This would be both in terms of time spent dealing with additional pensions administration, and a significant rise in contributions they would not have had to make before – so where employees who would otherwise have opted out entirely decide to opt in to just receiving employer contributions.
However, Paul Holcroft, associate director at Croner, comments that any adverse effect on the employer would likely be limited, given most employers should be working on, and planning their finances around, the assumption that all eligible employees will opt in. “It’s not possible to predict any decision from employees to opt in or out, so employers should always plan their finances around paying the contributions, and the partial opt-in would simply be treated by the employer as if the employee had fully opted in,” he highlights.
But allowing employees to benefit from employer contributions without making any themselves would have a negative effect on attitudes to saving for retirement, according to Nathan Long, senior pension analyst at Hargreaves Lansdown. “We know from experience that people are far more engaged when their own money goes into a pension. Watering down the requirements risks people just opting for the employer contribution and never revisiting the amount they pay.”
His concerns are shared by former pensions minister and now partner at Lane Clark & Peacock Sir Steve Webb, who oversaw the introduction of automatic enrolment in 2012. “The current legal minimum rate of automatic enrolment contributions is widely accepted to be short of the rate needed for most people. It would be very risky to send a signal, even temporarily, that an even lower rate was being endorsed,” he says.
“While something going in rather than nothing is obviously preferable, the risk is that people get out of the habit of saving into a pension when they have a job, and this could fatally undermine the behavioural ‘norm’ of automatic enrolment.”
Charles Cotton, senior policy adviser at the CIPD, agrees: “Allowing a partial opt-in would mean that low-paid workers would at least receive their employer’s contribution. The disadvantage is that less would be going into these workers’ pension pots and this could have an impact on their eventual retirement fund.
“One way of mitigating this drawback would be to allow opt-in for a set period, say a maximum of 18 months, and [making it so] that employees wouldn’t be able to use opt-in again for a set number of years. There would also be technical issues to consider as well, such as how this relates to employer re-enrolment duties, which kick in every three years.”
How likely is reform of auto-enrolment?
The government has yet to give any public indication that it is considering changes to the current rules. In response to a request for comment on this, the DWP told People Management: "From the outset of Covid-19, we have been gathering, monitoring and evaluating workplace pension participation and savings data in order to develop an understanding of the impacts the emergency has had on retirement savings behaviour, including for the lower paid workers.
"Once we have the fuller picture from available evidence, this will inform the government’s ambitions for the future of these reforms, the right overall level of saving, and the balance between prompted and voluntary saving."
But any change to the current rules needs to happen quickly to benefit employees, according to Windsor, who is sceptical of the government’s ability to do this: “A year or maybe two without a pension contribution can have a significant impact on an employee's pension. Sadly, in reality I think a change to the legislation would take too long to agree and this is a change that needs to be implemented quickly in order for employees to benefit.”
Some disagree the framework should be changed, however. “While Covid-19 is certainly an unusual set of circumstances, a recession isn’t and so the system shouldn’t just be watered down every time the economy takes a nosedive,” says Long.
He adds: “Currently there is very little evidence to suggest people are opting out in their droves and I think it unlikely the government would uproot the system right now. The problem with decoupling employee and employer contributions is that you lose that connection of both parties saving together.”