
The British workplace pensions have been put to the test
The rapid increase in the cost of living is now showing its initial effects
VS – 08/2022
The
British government gradually introduced automatic enrolment in workplace
pensions between
2012 and 2018. Automatic enrolment – which is also referred to as the opting-out rule – means that employees are automatically included in a workplace pension scheme
unless they actively opt out. This
reform has resulted in workplace pensions coverage in the UK increasing from 42
per cent in 2012 to 86 per cent in 2021. However, according to recent studies
the current increase in the cost of living is having a noticeable impact on
contributions being paid into workplace pension schemes.
Automatic enrolment in a workplace pension scheme
The Pensions Commission that was set up by
the British government in 2002 – also known as the
Turner Commission after its chairman – emphasised
that securing the standard of living in old age will require a significant
increase in supplementary pension schemes. This is why the decline in supplementary
pension schemes must be countered. Workplace pensions should no longer be primarily
aimed at higher salary groups but should include as wide a section of the
British workforce as possible.
One of
the consequences of the Turner Commission was that employers were obliged by
law to enrol all eligible employees between the ages of 22 and the state
pension age – currently 66 – who
earn more than 10,000 GPB per year in a working pension scheme. The minimum
contributions increased from five to eight per cent during 2021 and 2022. Four
per cent of this is paid by the employees, three per cent by the employers and
one per cent by the state. The contribution ceiling stands at 50,270 GBP.
NEST
(National Employment Savings Trust) was introduced as a defined contribution
employee pension scheme administered by a trustee in order to ensure that all
employers have access to a cost-effective working pension scheme provider. NEST
is committed to accepting all employers. The employers also have the option to
choose between 37 other certified providers (as of 2019).
First test incurred by the COVID-19 pandemic has been well mastered
Fears
that the COVID-19 pandemic would have a negative impact on participation in working
pension schemes have not been confirmed. This means that the proportion of
enrolled employees as well as the proportion of those who have stopped paying
contributions have remained stable. Only the level of contributions decreased
slightly during the pandemic.
Increase in the cost of living is showing its initial effects
The
current increase in the cost of living is being reflected through participation
in working pension schemes. The latest pension report from Scottish Widows states that eleven per cent of adults have
already reduced their contributions. According to a survey undertaken by the
Canada Life insurance company, five per cent of adults said they have stopped
contributing to their employee pension scheme. Six per cent also said that they
are thinking about suspending their contributions and another nine per cent may
well consider doing so in the future.
It is
important to pay contributions continuously and as early as possible into a
defined contribution pension scheme. On the one hand this is because of the
compound interest effect. On the other hand, this is because that in addition
to the employee's contribution, top-ups by employers and the state are also
eliminated in the British working pensions. In a model calculation made by
Canada Life, a 40-year-old who is being paid a salary of 50,000 pounds per year
today will lose 15,000 GPB if contributions are suspended for one year until
retirement at age 67. Therefore, the current rapid increase in the cost of
living is the biggest challenge yet for the new British working pensions
system.