25th February 2013
If Britain continues on the current trajectory for pension savings, the country will be in considerable trouble. The choice may be stark – either a huge pension bill or many millions of pensioners at risk of seeing out their lives in poverty.
The Office for National Statistics says that membership of company pension schemes has fallen for the 15th year in succession to 46 per cent of the workforce. This is the lowest figure at least since records began 15 years ago as HR magazine reports.
The ONS also found that half of private sector employees are receiving less than an eight per cent employer contribution as well.
Most pension experts would suggest that eight per cent is not really enough for most people unless perhaps people are in their early twenties where, hopefully, they may be able to rely on four decades of compounded returns. Even for older savers, however, eight per cent is clearly better than setting aside the nothing that 54 per cent may be saving in a pension.
The Government is trying to do something about this with its big workplace reform of pensions. In fact, the starting gun has already been fired. Some employees of the ten largest companies may have already joined the new system and it is being rolled out across the next group of employers by size at the moment so the next rank of big employers after some of the supermarkets and the banks.
The new system is designed to get that 46 percentage significantly higher. It relies on nudging or, cynics might say, inertia. Up until now, if you haven’t actively joined the company pension, you are not in the company pension. From around now, or at least in the next three years or so, you will be auto-enrolled if you don’t actively decide not to join and tell that to your employer that is the case. You must opt out periodically or once again you will be auto-enrolled. The theory runs that the inertia that has stopped people signing up to pensions will now mean they actually stay in a pension in future.
By 2017, you will be expected to put in four per cent, your employer must put in three per cent and the Government will put in one, though once again the full amount does not kick in until 2017.
But will this reverse the trend towards less pension saving? Well it might. But there are many challenges. One is the state of the economy and the fact that salaries have not risen much or at all. When Australia created its own system, which was fully compulsory on both employers and employees, it came at a time of rising salaries so people were able to adjust to setting more aside. Here many employees are seeing real terms cuts in their incomes.
In these straitened times, it is difficult to know how many people in the UK will opt out. It is also unclear what will happen with medium and more particularly smaller employers. Besides the extra admin, it will be very unpopular with smaller employers who haven’t offered schemes in the past and may see it as an additional business tax. It is illegal for employers to encourage employees not to join – and thus save the employer from paying compulsory contributions – but there may be many subtle ways of discouraging joiners.
Another issue is the fact that even if people do stay opted in, the eight per cent may not be enough to give them a decent retirement income. While the ONS highlighted the fact that many employers are paying less than eight per cent, the new minimum is eight per cent in total from employer, employee and government. Employers can pay more than their required three per cent of course but there are fears it could become a sort of standard. Some employers may decide to pay for the extra costs of enrolling more members by cutting benefits back.
For now though, perhaps the Government may want to concentrate of getting more people paying into a pension of some kind at least with some level of contributions and then worry about how to get those contributions higher at a later date. However if the next survey saw a further fall below that 47 per cent, there would be even more pressure on this reform to deliver.