The rapid increase in the cost of living is now showing its initial effects

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.