Pensions and the future of work by Charles Cotton

An article in yesterday’s Financial Times reported research from Alexander Forbes. It found that people in defined contribution (DC) schemes had lost an average of £10,000 a year of future retirement income over the past 10 years. To make up this shortfall, contributions will have to rise to one third of income if employees were going to avoid ending up in poverty when they retire.

Most of those in a DC scheme are private sector workers, though only around one third of all private sector employees are saving through a company plan. From 2012, those not already in a pension will be automatically enrolled into a workplace scheme. The contribution will be 8%, made up of a minimum of 3% from the employer.

Most commentators believe that 8% contribution is not going to be enough to fund employees a comfortable retirement, even when taking into account the state pension. For those already contributing more than this amount, Alexander Forbes research indicates that this may not be enough. The question then is who is going to pay in more?

Currently, it’s unlikely that most employees will be able to contribute more given that real wages have already fallen over the past half decade and are unlikely to improve in the near future (pay awards for those lucky enough to get one look set to lollop along at 3%).

What about employers?  While many firms have started to show increased revenues and profits, they are still uncertain as to whether this recovery will be sustained. They will be loath to increase their fixed costs if they believe that there is a good chance that the economy may be about to decline.

Of course, if employers and employees don’t put more money into pensions then down the line we’ll all end up having to pay higher taxes to support those pensioners who find themselves in poverty. So, what’s the solution when most employees and employers can’t afford to pay more into pensions?

If employees haven’t got enough to pay more in to their pension scheme then they’re going to have to work for longer. Similarly, if employers can’t afford to increase their pension contributions then they’re going to have to let employees work for longer.

Now, for some employers, letting employees carry on working for as long as they need to may not be an option. If that’s the case, then they will need to increase their contribution levels. However, the extent to which they do so can be mitigated to some extent by other initiatives, such as salary and bonus sacrifice, encouraging staff to pay in the proceeds from company share plans, reviewing pension scheme fund performance, especially the default and investing in employee financial education and awareness.

For those of us in HR, if people are going to be working for longer then we need to review what work is done, why it is being carried out and how it is organised to try and help ensure that individuals feel stimulated and engaged as well as having the right development, so that they can create value for the organisation. In the next few years, HR needs to look at whether it makes business sense to contribute more to the company pension scheme, let people carry on working for longer or some combination of the two.

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