An examination of the progress and impact of pension auto-enrolment in the workplace
Since automatic enrolment, the decision regarding workplace pensions comes down to how much the employer should contribute. Workplace pensions need to be continually reviewed in line with an ever-changing body of legislation. Employers should invest in effective employee communications, not only to meet legal requirements and ensure employees understand their options and the decisions they need to make, but also to raise awareness of the value of the benefit.
This factsheet explores the different types of workplace pension and the UK legislation governing them. It addresses strategic issues in workplace pensions with a series of questions and reflections to use when reviewing existing arrangements.
Organisations face a range of challenges in providing cost-effective workplace pension schemes that meet both employer and employee needs and can offer long-term stability. Employers should communicate and educate staff effectively about their pension scheme and recognise that the balance of risk is with an employee under a defined contribution scheme. Greater emphasis on non-state provision places further responsibility on individuals to plan for retirement, and regular and accessible information is critical to inform retirement choices and the success of the pension scheme.
It’s essential to manage workplace pension schemes within the law. Increased regulation has provided pension holders with greater protection, but made pension scheme management more complex, and organisations must ensure they keep abreast of legal developments both to protect members and avoid risk of liability. Corporate responsibility principles should play an important role in workplace pension schemes and enable individuals to make a positive social impact through their personal investment choices.
Pensions are a complicated subject and no action should be taken without professional guidance.
At the CIPD, we have an award-winning pension scheme under the Pension Quality Mark based on the level of employer contribution. We offer our people a free twice-yearly consultation with an independent financial adviser.
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What are workplace pensions?
Workplace pensions, also known as occupational pensions, are arranged by employers rather than by the state or an individual. The employer, and usually the employees, contribute to the fund.
The two main types of workplace pension are:
Defined contribution (DC) schemes (also known as money purchase schemes) where the income on retirement depends on factors such as stock market performance, the amount of money contributed and related charges and fees. DC schemes are either contract-based (provided by a third-party) or trust-based (run by an employer through a board of trustees).
Defined benefit (DB) schemes (such as final salary schemes) where the income on retirement is effectively guaranteed by the employer. Many of these schemes have been closed to new employees.
There are also certain ‘hybrid’ arrangements, for example ‘cash balance’ or ‘collective DC’ schemes. DC plans open to all employees are typically found in the private sector, while DB schemes are usually found in the public sector.
The legal position
An ever-growing body of UK legislation governs employers’ pension arrangements.
Pension contributions and benefits are influenced by HM Revenue & Customs limits and vary from time to time. Further details and the latest figures are available from the HMRC.
Automatic enrolment has been a major development. It requires all employers to automatically enrol eligible workers into a qualifying workplace pension scheme (unless the worker chooses to opt out) to which the employer must also contribute.
From 6 April 2019, the total minimum contribution is 8% (with at least 3% being contributed by the employer). The yearly administration charges and management fees a pension company can charge are currently capped at 0.75%.
Employers must re-enrol eligible staff who opt-out of a qualifying automatic enrolment pension scheme. Automatic re-enrolment occurs every three years after the employer’s staging date and is basically a repeat of the duties that were carried out at that staging, or deferral date if postponement was used.
Access to pension pots
Employees now have more freedom over how they take their money from their pension. The choices affect those aged 55 and over, especially those who have a DC pension. For instance, an employee in a DC scheme is no longer required to buy an annuity with their fund and can choose to go into ‘drawdown’ or take it as cash.
To help workers make informed decisions, the UK government has created Pension Wise, a free and impartial service, offering guidance on any tax and benefit implications as well as warning signs of a pension scam.
Employers are required to give employees who are members of their workplace DC pension information about their options and the decisions they need to make. This includes telling them about the Pension Wise service.
Strategic issues in workplace pensions
Workplace pension provision is a significant issue for employers. In many organisations, access to a workplace pension forms an integral and valuable element of employee financial well-being.
Since 2000, the workplace pension landscape has been shaped by:
- insufficient investment returns and low yields to help fund DB pensions pots
- increased longevity meaning more years in retirement for many people
- greater flexibility in working patterns
- the end of the default retirement age for most occupations
- increasing pension regulation
- introduction of auto-enrolment
- ending the requirement to buy an annuity
- changes to pension tax relief
- the increase in the state pension age
- ending the ‘contracting out’ of pensions
- the new flat-rate state pension.
Listen to our podcast on the current and future pensions landscape.
Our survey of employee attitudes to pay and pensions finds many employees are unsure about the new state pension in terms of what they can expect to receive and when. This is important as the state pension is expected to play a role in their decision to retire from paid employment. If they defer their retirement, this will have implications for how employers manage, develop and reward their workforce.
Organisations planning to review their existing pension arrangements should ask themselves the following questions.
Why have a workplace pension scheme?
As all employers are required to automatically enrol eligible workers into a qualifying workplace pension scheme, the decision isn’t whether to offer access to a pension scheme, but:
- which specific type of scheme (or schemes) to operate
- how much to contribute
- what level of financial education and communication to provide.
In addition to regulatory requirements, the decision should also reflect the organisation’s overall financial well-being strategy and its corporate responsibility strategy in alignment with business objectives.
Workplace pension plans should be influenced by:
- providing a competitive benefits package to aid the recruitment and retention of employees
- meeting the future needs of employees for their financial well-being, which may in turn help to fulfil a sense of moral duty or to enhance employee engagement
- allowing members to better align their pension savings with their beliefs and increase positive social impact through their investment choices in workplace pension plans
- managing pension costs effectively
- helping employees to leave the organisation when they wish.
Do employees currently value pension benefits as part of the remuneration package?
After salary, pension schemes can be the costliest element of the remuneration package for many employers. For a pension to be an effective benefit, employees must understand its value to them.
In general, pension arrangements that are simple to understand are more likely to be valued by employees. However, the degree of flexibility and choice within a pension scheme should depend on the profile of the workers. For example, a pension scheme offering a wide range of sophisticated investment choices may be suited to a financial services company but less appropriate for a catering firm.
Is the value of the pension benefit effectively communicated?
As our report Show me the money! highlights, behavioural science research shows that employees tend to under-value rewards they can’t enjoy immediately. To counteract this, employers need to invest in effective communication and education to raise awareness and understanding of their pension scheme.
To communicate effectively about pensions:
- Messages should reflect the employer brand, philosophy and culture.
- Material should be targeted and written plainly.
- Messages should take account of employees’ non-financial values, such as social impact, and explain how they can invest their pension benefits in a way that supports and enhances these values.
- Line managers should be involved where appropriate, for example in cascading announcements of change rather than in a detailed technical capacity.
- Messages should cover what the scheme is and how it works, but also why it's important for employees to plan for their financial well-being.
- Explain how the new state pension currently works, because many employees are unaware of the new arrangements.
- Highlight other sources of information, such as Pension Wise.
- Avoid confusion between financial education and financial advice, as the latter is covered by specific regulations.
Listen to our podcast on communicating the value of pensions.
Are employees financially aware?
Investing in an excellent pension scheme to help attract, retain and engage staff may be wasted if employees lack financial understanding. Our report on employee financial well-being shows how financial concerns can affect employee mental and physical health and the impact that this has on business performance. It also provides help for organisations wanting to improve their employees' financial awareness.
What culture does the organisation wish to foster?
When building future pension arrangements, it's important for employers to consider the role they want to play in employees’ retirement planning.
If organisations choose to take high levels of responsibility for employees’ financial security in retirement, these arrangements may be appropriate:
- a DB scheme,where employers take the investment risk
- a ‘hybrid’ arrangement where both the employer and employee share the various pension risks.
Alternatively, for organisations wanting to promote a culture of partnership or self-reliance in retirement planning, these schemes could be suitable:
- a flexible pension scheme where levels of benefits can be traded within the remuneration package, and/or
- a DC scheme where employees make investment decisions concerning their retirement and are fully exposed to investment risks.
Does the organisation wish to differentiate pension benefits on grounds of employee preferences?
Employees can have differing attitudes to pensions. For example, senior staff may find it more attractive than young recruits who initially may be more interested in saving for a first home. Within a DC plan, flexible benefit schemes can give employees the option of contribution rates that allow them to make variable payment levels as desired, at different stages of the work or life cycle, subject to annual and lifetime contribution allowances. Read our factsheet on flexible and voluntary benefits.
Has the organisation acquired, or does it intend to acquire, other companies?
In cases of merger and acquisition, it's likely that a variety of types of pension schemes will operate. This can make pension management complex and limit a coherent remuneration approach. In these circumstances, a flexible remuneration strategy, including flexibility in pension level design, can be beneficial.
Is the organisation an international company?
A multinational company may wish to harmonise its pension arrangements. However, differing tax and social security laws internationally will make this difficult. Consistent principles can, however, be applied and global companies usually need to set a framework within which retirement benefits are designed and funded worldwide. As a minimum, organisations should ensure that internationally mobile employees are covered by coherent pension arrangements.
Useful contacts and further reading
Books and reports
CMS PENSIONS TEAM. (2019) Pensions law handbook. 14th ed. London: Bloomsbury Professional.
RACONTEUR. (2018) Workplace pensions. 28 February. Distributed in The Times.
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BASKA, M. (2018) Employers ‘must do more’ as figures show almost half of staff contribute bare minimum to pension. People Management (online). 9 May.
BETTELLEY, C. (2015) Change of direction. Employee Benefits. March. pp25-26.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Charles Cotton.
Charles Cotton: Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.
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