Few policy interventions have reshaped retirement saving as dramatically as automatic enrolment. Today, almost £150 billion is contributed to workplace pensions each year, with employers providing 62 per cent of contributions, employees 27 per cent, and tax relief the remaining 11 per cent.
However, the second Pension Commission’s interim report, which is considering how to address retirement undersaving and improve future retirement outcomes, suggests the job is far from finished. Despite all this money flowing into pensions, the current minimum contribution rate of 8 per cent of qualifying earnings, with at least 3 per cent from the employer, is unlikely to provide an adequate income in retirement.
While we don’t yet know what reforms the Commission will recommend, or which proposals the government will then accept, employers should be considering what the next phase of reform could mean for their workforce systems and reward strategies.
One way of addressing this retirement adequacy gap would be to bring more people into pension saving earlier and increase the earnings on which contributions are calculated. The Extension of Automatic Enrolment Act 2023 provides a framework for doing exactly that.
Most commentators expect further measures to increase pension saving, with implementation likely to be phased over several years to give employers and workers time to adjust. So, the simplest option is for the government to implement the Extension of Automatic Enrolment Act 2023.
The Act allows the government to lower the automatic enrolment age from 22 to 18 years. People would start contributing earlier and ultimately have a larger pension fund when they retire. The Act also allows the reduction or removal of the lower level of qualifying earnings (LLQE). If the LLQE was abolished entirely, then both employer and employee pension contributions could be calculated from the first pound of qualifying earnings.
What could the reforms mean for employers?
While the exact shape and timing of any pension system reforms remains uncertain, employers are likely to face challenges in three key areas: operational readiness, workforce communication and managing higher pension costs.
CIPD research shows that there would be implications for employers in low-waged sectors that employ many young workers or use the LLQE to trim their pension costs. Affected employers would need to update their HR, payroll, and pension administration systems so that the newly eligible workers are enrolled and contributions are calculated in line with new regulations. Employers may also need to revisit governance processes, data management arrangements and compliance procedures to ensure they remain fit
for purpose.
Workforce communications
Implementation will not simply be a systems exercise. Communication with employees will be equally important. Employers will need to explain to existing employees why their pension contributions are going to increase as well as putting procedures in place to re-enrol those people that have opted out because of the changes after three years.
Employers in sectors such as retail, hospitality and leisure, may face additional challenges communicating changes consistently across a diverse workforce. Processes for re-enrolment, opt-outs and ongoing employee engagement may all need reviewing.
Employers will also need to consider how they pay for their higher pension contributions. For example, they could review salary sacrifice arrangements, contribution levels, matching levels, etc. They could also review the current benefit spend and how savings can be made by cutting back on such benefits as medical care or hybrid working. Some employers might need to consider what steps they need to put in place to help those lower-waged workers who are now spending more on pension savings.
Why advisers matter more than ever
Pensions and benefit advisers, providers and consultants have a crucial role to play in helping employers prepare for these changes. Ahead of implementation, this involves working with HR, payroll and pension teams to ensure the systems enrol the right person at the right time in the right way into the workplace pension plan, as well as ensuring that the right amount of money is being contributed.
Advisers also have a role in helping establish what the financial impact will be for an organisation and can help work through where the employer can make savings. They can also do this for an organisation’s employees and look at how the benefits package can help make higher pension contributions more affordable. Alongside this, they can help to foster the financial resilience of their employees so that they are better able to afford to pay more.
Beyond this, advisers can help employers bring the changes to life for employees. That includes showing younger workers why starting to save earlier matters, and helping those paying higher contributions understand the long-term benefits for their retirement income and pension savings.
Employers will need to think carefully about how any additional pension costs can be funded sustainably. Ideally, this will come through productivity improvements. High-performing organisations are better placed to absorb new costs, and HR and reward teams can support this by improving job design, workforce capability and employee performance.
Automatic enrolment has been one of the UK’s most successful policy reforms, but the debate has shifted from participation to adequacy. Whatever recommendations emerge from the Pension Commission, employers are unlikely to be untouched by the next wave of pension reform. Those that prepare early, with the support of their advisers, will be best placed to manage the transition and ensure workplace pensions continue to deliver value for both employees and employers.
