Our latest survey of employers looked at the impact of automatic enrolment on pension provision. It revealed that, although the minimum contribution employers are required to their employee’s retirement nest egg is just 1% of salary, many are contributing much more. In fact, the average contribution for a newly enrolled worker in the private sector is 4.5% (but this will vary by sector, size and region, etc).
Separate research by the Pensions Regulator finds that around 4.5 million workers have now been enrolled into a workplace pension. This means that, for many employees, the total remuneration bill (i.e. pay plus pension contributions) has gone up, even if growth in salaries has remain subdued. But, that’s not to say that employees are necessarily feeling better off – especially those who are contributing to a pension for the first time and therefore feeling a pinch in their take-home pay.
With the average newly enrolled worker contributing 3.7% of their salary each month to their pension pot, they’d be forgiven for seeing their pension contribution as a tax or a cost. HR and reward professionals therefore have an important role to play in reminding staff that pension contributions are in effect deferred pay, the benefits of which they’ll reap when they come to retire (although what retirement really means in this day and age could be the subject of another blog, along with the future role of pensions in the recruitment, deployment, management and reward of employees). We need to help employees understand that their earnings consist not only of what they get now through their pay slip, but also what they will get in the future from their pension. That’s why any proposals to change the tax treatment of pension contributions need to be rigorously examined, to make sure they don’t dissuade people from saving for their retirement.
Looking to the future, employers should be looking for ways in which they can play their part in encouraging staff to save more. While the recent pension schemes changes may make contributing to a defined contribution plan more appealing, many employees and employers may feel they’re not in a position to contribute anything more than the minimum requirement.
Interestingly, our survey indicates that employee and employer contribution levels are higher in those companies which have a business strategy focused on product or service quality, compared with those firms that focus on cost and price. Perhaps it’s not too surprising that firms that rely on their talent for their success are more likely to share that success with employees through such rewards as higher pension contributions or that employees in such organisations are more able to make larger contributions. It’s also the case, according to our research, that firms which focus on product or service quality are more likely to have reviewed their pension schemes or have plans to do so in the next 12 to 18 months. This all points to a wider imperative for HR and business leaders more generally: we need a strategy to help as many of those organisations stuck in competing on price to raise their sights and to compete on quality, and we need to support those firms that are trying to compete on quality so that they have the vision, resources and expertise to deliver on this intention.
While the more challenging aspect of automatic enrolment has yet to come (when more than one million small and micro employers start to comply with this legislation), thanks to a lot of hard work from HR, payroll and pension professionals up and down the UK, auto enrolment has been more successful than many anticipated. With average drop-out rates below 10% (according to our survey), I think at least a small pat on the back is deserved.
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