Variants and new significant outbreaks permitting, pandemic measures look set to be scaled back, although there may be bumps along the way. At the same time, the expectation is that government support in terms of furlough and self-employed grants will end soon as well.
As with most sectors of business and society, workplace pension professionals are beginning to consider what the next chapter holds.
The Pensions Regulator is alive to the risks but reasonably optimistic in its recently published three-year corporate plan.
“While the outlook for recovery remains positive, we are conscious of the risk of future Covid-19 setbacks that may necessitate further restrictions on economic activity. These downside risks have the potential to affect everything from the opportunities to save for a pension, to the performance of workplace pensions or the ability of employers to support them.”
TPR has phased out the easements on offer during the pandemic, though these were mostly around reporting, notifications and administration and not the pounds and pence of contributions.
Final furlough
It is likely therefore to be withdrawal of furlough that looms largest. Employers using the scheme are currently paying w ag es, NI and pension contributions for worked hours and NI and pension contributions only for unworked hours.
From July 2021, employers will need to contribute to furlough pay for unworked hours, starting with a 10 per cent contribution in July and rising to a 20 per cent contribution from August until the furlough scheme closes at the end of September 2021.
Pension providers and consultants continue to maintain a watching brief but believe that workplace pensions should continue to show the remarkable resilience they have displayed to date, although the end of furlough may prove testing.
Aegon UK head of pensions Kate Smith says: “The job retention scheme has been a godsend, propping up thousands of jobs and helping many employers to retain their workforce and continue in business, riding out the storm.
“However, from July it will start to taper, with employers covering more of their wages bill, and is currently due to finish at the end of September. Jobs and pensions are inextricably linked. To date, largely due to the job retention scheme, apart from some sectors such as hospitality, there’s been very little impact on the level of pension savings, which has been remarkedly resilient.
“The pension industry is holding its breathe to see what will happen to the level of pension savings once the scheme stops, and this is likely to depend how quickly the economy and jobs fully bounces back. In the meantime, it’s important that the pension industry continues to highlight the importance of saving in general and remaining in their workplace pension scheme and benefiting from the employer pension contribution through creative and targeted digital communications.”
Cost savings
Aon senior partner and head of DC Consulting Ben Roe says: “The impact could be two-fold – firstly if we do see higher rates of unemployment, individuals will stop saving for retirement for a period. Secondly, we may see some corporates try to generate cost savings by reducing level of pension spend. We have seen some evidence of this to date but we do expect to see more of this when the support packages are turned off.”
Hargreaves Lansdown senior pension analyst Nathan Long says: “Whilst it probably won’t make the most exciting story, we think membership of workplace pensions will remain pretty resilient as we start to return to normality. It will be interesting to see what happens in the retail and hospitality sectors which have been most affected. I’ve been hearing of people who’ve been furloughed since the first lockdown now handing their notice in and switching careers into different sectors. I’d anticipate this group would be likely to stick with their new pension with a new employer as they are freshly auto- enrolled.
“I think it’s more likely that we’ll see savings levels blunted by the Covid fallout. It’ll be hard for employers to stimulate the appetite to save more than the minimum.”
CanScot Solutions principal Robert Reid foresees financial challenges. He says: “The same conundrum faces unions – what do you put first? Pensions or jobs? It is well-known that auto- enrolment meant frozen salaries for a large part of the population while things caught up with the contributions employers made.”
Cost savings
In terms of managing costs, Roe says reducing benefits is not a good idea: “One option for generating cost reduction is to look at the benefits which are provided to members. We generally don’t think that this is a sensible approach when we think about the likely retirement savings gap which exists for many. The other solution is to look at the delivery structure for the DC scheme and this can be a relatively straightforward way to reduce costs while in some cases actually improving the member experience. We know that many large pension schemes currently have an unbundled trust- based approach and so possible solutions include moving to a bundled trust-based approach or a master trust. In both cases this can lead to cost savings and could free up time to focus on running the core business.”
On the employee side, Roe says that an Aon survey of over 2,000 employees in conjunction with YouGov released earlier this year did show more employees expecting a shortfall in their retirement savings (87%). A significant impact from this being that generally employees are now expecting to work until older ages with one in three expecting to retire past age 70, and a significant proportion or one in four thinking that they will never be able to afford to fully retire.
For those who are off track, Roe says: “Ultimately responsibility ies with employer and /or trustees. But consultants can help by highlighting the risks to employers of their employees not being able to afford to retire when they would plan to. These risks can include ncreased employment costs, lower engagement levels and productivity
– the latter two not just amongst those who cannot afford to retire, but also younger employees whose career progression may be being held up. Consultants can support
employers in understanding the likely outcomes for different groups across their workforce and help put plans in place to include targeted measures; either through nudges, communications or changes to plan design, to help get employees back on track with their retirement saving.”
Minimising opt-outs
LEBC public policy director Kay Ingram believes its approach has helped minimise opt outs. She says: “We have experienced a low level of opt outs so far. This is primarily because we offer schemes the benefit of workplace guidance and advice with annual reviews to help members keep on top of their retirement planning. While some scheme members
have enquired about ceasing contributions, most have changed their minds once they realise that the cost of their contribution is often less than the employer contribution and tax relief combined and is further enhanced with NI savings, through salary exchange, so they would save relatively little in personal cashflow terms and lose a lot more.”
Cavendish Ware associate director Roy McLoughlin says: “I haven’t had as many phone calls as I thought I was going to have asking ‘is there any flexibility in the pension contributions’. I think we have almost had an assumption among employers that there is no flexibility. Pensions have become the habit, the norm, and employers know there is little or no negotiation.”
Indeed, he is finding that some employers are engaging more in what he sees as a shift to more paternalism certainly among the employers he works with.
His view is that employers should be thinking about moving to five plus five in contribution terms. “There is something wrong about five plus three for me. The lack of matching doesn’t feel right. We think there is a sea change in employers taking people to what I would call a proper provider and taking contributions up to four plus four or five plus five.”
Case for pensions
Many in the industry suggest we need to remake the case for pensions.
PTL managing director Richard Butcher says a global initiative is needed around savings. “It needs to include government. Across the piece we know people are saving too little. It’s not entirely their fault
– the disclosure framework doesn’t lend itself to giving members the information they need to make informed decisions. Promoting the PLSA retirement living standards would be a great start – an item of data the member can easily relate to. Once engaged we can educate them,” he says.
Reid adds: “They are probably going to get a state pension which will be between 40 and 50 per cent of what they need. There is a lot of talk recently about they should save now or wait till they are in their 50s. I don’t think they should wait completely, but we should get used to a stepped form of contributions. The biggest flaw in the AE design is the same contributions for all ages. You are putting the same amount of money in for totally different terms and hoping you are going to get the same result, which you are not going to get. You have to be cleverer than that. You need to make it clear your objective is to reach the same level.
“I don’t think there’s a problem with differential contribution rates. Say it was 5 per cent for younger and for older workers 15 per cent. You could argue it needs to be higher from the employer as well.”