As employers, it may have seemed like we have had some long overdue respite in relation to workplace pensions and employer duties, but what trends are in play and what impact will they potentially have on engagement?
Contributions
As consultants, a question we are often asked is whether the minimum contributions for auto-enrolment will potentially be increased. The short answer is ‘not at this time’.
One leading pension provider1 has recommended that in order to ensure a minimum amount of savings income for retirement, as estimated by the Pensions and Lifetime Savings Association Retirement Living Standards2, a working employee should aim to be saving at least % into their plan each year until State Pension age (the figures quoted by Aviva are now likely to be insufficient since the PLSA has increased their estimated incomes for 2024 by between 25% and 33% for a moderate retirement).
Interestingly, in a much older study by the, for a moderate income in retirement, they should be saving 26% toward their pension. In the latest report (Five Steps to better Pensions: Final report4) from PLSA, they propose “More people should be saving into a workplace pension and at higher contribution levels. Over the next decade contributions should rise gradually from 8% to 12%. While employees should only be required to put in 1% extra, we believe employers should put in 3% extra, with the result that by the early 2030s each will be paying 6%, totalling 12%”.
Depending on who you believe, there is consensus in that current minimum levels are insufficient for pension adequacy.
With minimum contribution rates set at a total of 8% of qualifying earnings, there is likely to be a shortfall for employees who are only saving the minimum, who have opted out or never been enrolled.
Where employers increase pension contributions to their employee workplace pension scheme, there is a tax advantage, as employer pension contributions are not usually subject to corporation taxes or National Insurance contributions.
Symbiotically, where employees are required to pay a greater percentage, there is also an income tax advantage (and sometimes a further National Insurance saving) where salary exchange is in place.
What do employees think? In a recent press release from the Phoenix Group5 following research on a significant population of 3,000 adults, they found that 83% agreed the Government should assess whether the current pension system allows for adequate retirement income, and 71% concurred that the Government should consider a plan to increase the minimum contribution rate.
With the increases to the minimum and living wages, increasing pension contributions could be a good way to reduce the overall impact of taxation increases. There has been no indication that legal statutory minimum contributions will be forcibly increased at this time.
However, we are seeing a trend with our employers requesting contribution benchmarking information, and budgeting for future increased spend in this area.
- How much should I pay into my pension? – Aviva
- Home – PLSA – Retirement Living Standards
- Savings Goals for Retirement (actuaries.org.uk)
- PLSA – Five Steps to better pensions
- Adequacy research – Phoenix
If you would like help in reviewing your contribution structure, please contact your Mattioli Woods consultant.
Content correct at time of writing (September 2024).
This article was written by Employee Benefits Consultant, Michael Hand.
