Analysis: As questions remain over the adequacy of auto-enrolment contributions, a shift in the balance between employers and employees might provide the answer towards raising retirement saving levels.
The Department for Work and Pensions is currently carrying out its review of auto-enrolment, which is expected to be finalised by the end of the year. The review includes consideration of workers with multiple jobs and the self-employed.
Minimum contributions are set to increase in 2018 and 2019 to a total of 8 per cent of pensionable salary, with employees contributing 5 per cent and 3 per cent coming from employers.
I do think that employees value something more if they pay something towards it themselves
Karen Partridge, AHC
The imminent change in contribution levels will leave UK employers with 37.5 per cent of the burden of a workplace scheme. By way of comparison, Italian employers shoulder 84.8 per cent of contributions. Italy implemented automatic enrolment in 2007.
Employers should pay the bulk of a pension
In 2016, a survey conducted by mastertrust Now Pensions showed that 74 per cent of respondents who intended to quit their schemes following the rise in contribution rates would either 'definitely' or 'probably' remain part of their workplace pension schemes if the contribution balance was reversed and employers paid 5 per cent instead.
Adrian Boulding, director of policy at Now Pensions, said that experts held concerns over savers opting out of their workplace schemes once rates rise.
Boulding argued that the elimination of qualifying earnings for auto-enrolment would be a good way to increase contributions. Currently, the first £5,876 of an employee’s earnings is not pensionable.
With the introduction of the 8 per cent contribution rate, the impact of the qualifying earnings bracket on lower earners will become more pronounced.
An employee earning £20,000 a year will have qualifying earnings of £14,124, which is 5.6 per cent of their salary. By contrast, only 3.3 per cent of a £10,000 salary will be contributed to a pension.
“The quickest way, and the best way, to get there is to start by phasing out these qualifying earnings, and showing that all salary should be pensionable, from the first pound that you earn,” said Boulding.
Contribution rates must meet retirement needs
The UK is not alone in expecting employees to contribute the majority of their workplace pension. In New Zealand, Pensions Policy Institute research reveals that employers make minimum contributions of 3 per cent to their scheme. Employees have the option to pay in 3 per cent, 4 per cent or 8 per cent of gross pay.
The PPI suggested that “it is possible that employers… view their legal minimums as recommendations for how best to support their employees in meeting their basic retirement needs”.
In Australia, employers have to pay 9.5 per cent of an employee’s salary into their superannuation fund. An employee is not legally compelled to pay into their scheme.
“I think that from a point of view of getting people to save for their retirement, it’s essential that we engage employers to pay towards that. However, I do think that employees value something more if they pay something towards it themselves,” said Karen Partridge, head of UK client services for communications consultancy AHC.
“It’s far easier to engage employees with something that costs them something," she said and added: "The important thing is that the level of contribution overall is sufficient to meet the needs of retirement, and that’s where the Australian super guarantee is so much better than what we have.”
Use auto-enrolment to tackle inertia
Research suggests that the UK has taken the most crucial step by introducing auto-enrolment as a mandatory requirement for employers. In the US, Fidelity Investments found an 86.2 per cent participation rate in auto-enrolment schemes, compared with 51 per cent participation in non-automatic plans.
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But minimum contribution rates clearly play an important role. In New Zealand, rates dropped to 2 per cent from 4 per cent in 2009. According to the PPI, 62 per cent of pre-2009 members maintained their 4 per cent contributions, while 80 per cent of post-2009 joiners pay the 2 per cent rate.
Member understanding of pensions adequacy is also important in ensuring they contribute the correct amount towards their retirement savings.
Mark Sullivan, senior vice-president at Fidelity Benefits Consulting, said that financial literacy levels are comparatively high in places including the US, Hong Kong and the UK, and that a reasonable proportion of these populations can make informed retirement decisions.
“However, I don’t think really people fully understand or appreciate how much money they need to have [for] a sustainable retirement,” he added.
