Pensions: A decade of auto enrolment & RDR

Over the last decade the pensions population has virtually doubled to approximately 21 million. This massive growth in the flow of pensions contributions has inevitably placed responsibilities on all the stakeholders. Including, pension scheme trustees, advisers, and employers. Add into the mix the new freedoms allowing scheme members to exercise more choice in how and when they take their retirement benefits. We are now in a world where the stakeholders have a legal and moral obligation to ensure all new pension investments truly deliver value for money.

The outcome of RDR was to ensure that employers who needed advice on fulfilling their legal responsibilities could do so. Assuring that fees were transparent and advisory bodies needed to meet certain standards of qualification.

So, let’s have a quick look back to remind ourselves of what happened. Reflecting on whether the current situation creates new opportunities or obligations.

Auto enrolment (AE)

Auto enrolment was introduced by the government in 2012 to address the challenge of not enough people saving into pensions for their retirement. Prior to auto enrolment, it was the choice of employers whether to offer a pensions scheme to staff. And the responsibility of employees to decide whether they wanted to join their employer’s pension scheme.

Auto enrolment required all UK employers, regardless of the number of staff they employed, to provide access to a workplace pension scheme. Not only providing access, but automatically enrolling staff into it. Effectively the government bet that inertia would be a powerful weapon in bringing more people into the world of saving towards their own retirement. No action needed to opt in, instead action required to opt out.

The legislation set minimum standards for contributions. With a raft of requirements around scheme design, employee assessment and ongoing compliance.

A cap on pension scheme charges was also introduced by the government meaning auto enrolled scheme members would pay a maximum of 0.75% annual management charge (AMC). The introduction of the cap has led to increased competition amongst pension providers. And employers may find that an AMC significantly below the 0.75% cap can often be obtained.

So, what should employers consider doing now?

Pricing pressures have continued on a downward theme, so if the last time you reviewed your workplace pensions provision was over three years ago you might find a better deal by working with an advisor. Employees will benefit from any reduction in charges that can be secured and see their pensions grow more quickly leading to a bigger pot at retirement.

Pension Freedoms

One of the most significant changes over the period was the advent of Pension Freedoms. This introduced a range of choices to defined contribution (DC) pension savers at retirement, including:

  • Flexi-access drawdown
  • Annuity purchase
  • Uncrystallised Fund Pension Lump Sum
  • Take the whole pot – up to 25% of fund tax free and the remainder taxed as income.

Prior to Pension Freedoms the majority of DC scheme members would purchase an annuity in retirement. However, data obtained from the FCA, shows that more than twice as many pension pots are now moved into drawdown rather than into annuities.

What do employers need to think about?

Default funds

Many employer schemes in the past had pension schemes with default funds that targets an annuity. This will lead to members pensions at retirement age being invested in potentially inappropriate assets. Should they choose to go down the route of taking their pension income as drawdown say.

Employers should ensure that the default fund of their pensions scheme is regularly reviewed. Ensuring its best placed to produce the type of retirement outcome that the majority of their workforce is likely to want. Whilst the pattern of de-risking is relevant to this review work, it’s also worth noting other changes in the world of investing. Like ESG considerations, access to a suitable range of fund choices, and member engagement in their investment choices.

What retirement options are available to scheme members?

Some workplace schemes may not offer access to the full range of options at retirement. This is more likely to be the case with older schemes. Employers may wish to review what retirement options are available for their employees within the current scheme. Ensure that members can access the options most suitable for their requirements.

The complexity of the options on offer now means that employers are increasingly seeking to provide their staff with guidance and financial education. Ensuring that employees get the best out of their hard-earned savings and that, crucially, employees are armed with the information they need to reduce the risk of falling prey to a scam. Doing so also benefits the business as they are able to successfully navigate succession challenges.

Default Retirement Age 

The State Pension Age has undergone various changes. With women’s State Pension Age being equalised with men’s, and for all increasing gradually over time. It is planned to reach 67 by 2028 for both men and women, before increasing further to 68.

How does this effect employers & what impact should you consider on your workplace pension scheme?

Many employer schemes still have a default retirement age of 65, a de facto age picked in the past. For the (often sensible) reason that many of their employees might be expected to take retirement benefits at the point where they reach State Pension Age.

Although members of the scheme don’t necessarily need to take their benefits when they reach their scheme retirement age. The way their pot is invested could potentially be affected.

Employers should consider reviewing the default retirement age of their scheme in line with the requirements of their scheme membership. This might include analysis of the age profile of your staff, bearing in mind that the State Pension Age is no longer the ‘fixed target’ that it used to be.

Employees can still have the option of picking a different retirement age should they wish to.

Future changes?

Net pay anomaly

Looking forward to future legislative changes, the government plan to introduce a system of ‘top-up’ payments for low earners in net pay arrangements in respect of personal contributions made from 2024/25.

The top-up payments will ensure that those staff on low incomes who are contributing into pensions schemes using a net-pay arrangement receive the additional amount that they would have received in tax relief if they were earning a salary above the personal allowance. It is hoped that this will help these staff to save a suitable pensions pot for retirement.

Employers need to be aware of any changes in how their scheme is administered and be alert to any communications ahead of the introduction.

Given the scale and ongoing nature of legislative changes happening in the pensions industry, it is now more important than ever that employers review their pension arrangements and attempt to increase employee engagement with their pension savings. Broadstone’s consultants are on hand to assist your business with this.