Law firm Walker Morris's Ruth Bamforth looks at what an ageing society and the general shift to defined contribution arrangements means for employers and how they manage their workforces.
The UK workforce will grow older with the abolition of the default retirement age. A Department for Work and Pensions report in 2013 found 27 per cent of the UK workforce was aged over 50, with this figure expected to rise to 33 per cent by 2020.
The employer must manage what may be a fluid, possibly part-time, workforce at the older end of the spectrum
While older workers increasingly seek to continue to work, young people are entering the workplace for the first time. The pension aspects of workforce management, therefore, will become an ever more important issue for employers.
Ageing workforce
Changes to employment law have meant that retirement age is a thing of the past. Older workers who perform to the required standards should be viewed no differently to younger workers. The employment law challenge is dealing with older workers whose performance falters.
Pension issues may be a key driver behind whether or not an older worker wishes to continue in work. Increasingly, workers will be relying on their DC pension pots to provide them with retirement income.
Until the tax flexibilities were introduced in April 2015, a worker had to use his or her DC pot to purchase an annuity, despite annuity rates continuing to decline.
The lack of buying power, coupled with often small DC pots, led to some workers seeking to reduce their working hours rather than retire completely. The question for the employer is whether to grant these requests, and what impact they may have on its business and other employees, including the ability to bring in new workers.
The tax flexibilities addressed concerns about annuity inflexibility, but they present challenges for both workers and employers. For workers the challenge is to negotiate the minefield of the different options available – workers may take all of their DC benefits as a lump sum (or series of lump sums), but they need to consider how to meet everyday living costs when they are no longer able to work.
Again, the employer must manage what may be a fluid, possibly part-time, workforce at the older end of the spectrum.
Younger workers
Pensions have tended not to be high up on the young worker's agenda. Automatic enrolment was introduced to tackle this. To date, automatic enrolment appears to be a success: opt-out rates in general are fairly low.
It remains to be seen if this changes as member contributions rise to 5 per cent from April 2019. It is likely that automatic enrolment contribution rates will need to rise still further in order to provide workers with a decent DC pot at retirement.
Financial education is poor in the UK, and many younger workers lack understanding about financial products. The announcement in the Budget 2016 of the Lifetime Isa, targeted initially at the under-40s, may add to the confusion – or maybe the Lisa will herald further overhaul in the pensions space.
Pace of change
For more than 10 years now, hardly a year seems to go by without there being some change to pensions policy and regulation. This world of change and increasing complexity presents a challenge for all workers and their employers.
To date in the DC world – which in practice means increasingly the personal pension world – employers have tended to be hands off in terms of communication with members, despite encouragement from the Pensions Regulator.
The pensions dashboard, announced by the chancellor in the latest Budget, will go some way to helping workers understand their total retirement income across all their pension arrangements.
But the dashboard on its own is unlikely to be enough. Financial education across the board needs to improve and, if the regulator gets its way, employers will need to take a more active role in both engaging with their pension schemes, and communicating and engaging with workers.
Ruth Bamforth is an associate at law firm Walker Morris
