10 May 2018
When the Workplace Pension Reforms were first introduced, minimum pension contributions were set that an employer had to pay to their Workplace Pension Scheme, increasing over time. Whilst Auto Enrolment has been the norm for some time now, it’s amazing to think that we have only just reached the first increase in contributions, from 2% to 5% total, effective from April 2018.
Many firms are paying more (and in some cases, much more) than the legal requirements – but what is the benefit of doing this?
The minimum is just that……….it’s not enough!
There is a wide understanding that minimum contribution level of 8% from April 2019 will not provide someone with a sufficient pension in retirement to live on comfortably. Research by the Pensions Policy Institute (PPI) suggests that a total pension contribution of 12% is more realistic and even the Department of Work & Pensions (DWP) own review in 2017 stated: “We recognise contributions of 8% are unlikely to give all individuals the retirement to which they aspire”.
This suggests employees should be paying upwards of 10% of their salary into a pension, which gives employers an opportunity to demonstrate they are prepared to make a long-term investment in their employees by paying more to their pension. Offering higher pension contributions shows a commitment to help employees secure their financial status in the longer term….it’s in effect ‘deferred pay’. Given the amount of publicity pensions have received in recent years and the fact everyone is aware every employer must pay a legislated minimum contribution paying more than the minimum has become a very distinguishable ‘added value’ benefit which can help attract and retain staff.
The cost to increase contributions for all employees may be too high
Of course, paying higher pension contributions for all employees will not viable for every employer but there are ways of restricting increases to certain categories of employees. For example it could be used to reward employees who achieve a certain position within the business, a level of qualification /compliance or a favourite of ours, loyalty.
Another option is to match higher employee contributions up to a certain point, so rather than providing an increase for everyone, an employer only pays more into the pension when employees do. This sees employers providing additional value to employees who place importance on their pension themselves, therefore maximising the benefit of the additional spend. Employers could match the increased levels to clear (non subjective we’d suggest) company values or targets as long as these of course do not discriminate.
Add ‘value’ without significant cost
Employee guidance, education and support can be provided without significant increases in cost. Pensions are rarely seen as being easy to navigate, so providing information they can understand will ensure workers feel included, engaged and ultimately value their pension contribution benefit. If they don’t understand it they are unlikely to value it and certainly not to the extent the employer would want bearing in mind the cost. Employees highly value guidance which they can understand and act upon around their investment choice, retirement options, required levels of savings etc. At the same time they rarely have the time to source let alone educate themselves on a subject they see as complicated to start with. For this reason simple, short one to one human assistance can provide a huge benefit at a low time or financial cost.
Whichever way you look at it, pensions have been brought back to the forefront of many employees minds when it comes to considering benefit packages. This is only likely to intensify with the increases to auto enrolment pension contributions this and next year and the ever increasing realisation that the State Pension is unlikely to provide what people had hoped and certainly not when they’d originally expected it. As such anything an employer can do to increase the value of its pension benefit will be recognised and valued more so than it likely would have been in the recent past.
Jon is one of our benefit advisers and can be contacted at email@example.com or 01883 332269. Alternatively please contact any of our Employee Benefits Team at 01883 332260 or firstname.lastname@example.org