Government pensions and enrolment
Reliance on a state pension has been a concern to governments globally for a substantial period of time. Encouraging individuals to take responsibility for their own retirement seems to have had limited impact and many people seem to be entering retirement with insufficient income to enjoy a comfortable standard of living.
In the UK, employers are now required to undertake a formal assessment of all employees. Employees are usually categorised based on age, earnings and other qualifying criteria . Qualifying earnings in the UK are earnings between £6,136 and £50,000 and includes salary, overtime, commission, bonuses, statutory sick pay, maternity, paternity and adoption pay.
In the UK, employers must auto enrol any eligible jobholder who ‘opts in’. The process must be completed within 6 weeks (the joining window) starting from an auto enrolment date.
The steps for auto enrolment are typically:
1) Giving the pension scheme information about the elidgeable jobholder
2) Giving the elidgeable job holder enrolment information
3) Making arrangements for the elidgeable jobholder to become an active member of the scheme
An employer has the option to postpone or defer assessment of an employee if they are temporary workers who they do not expect to be employed beyond 3 months. In the UK, postponement can only be exercised on one of three dates.
1) The employer staging date (stating dates are provided by HMRC and are usually based on the number of employees within a company), in respect of any workers employed on the staging date.
2) The employee’s first day of employment, in respect of any worker starting employment after the employer’s staging date.
3) The date a worker employed by them subsequently becomes an eligible worker after staging or employment date.
After the employer decides on which date will be used for postponement, a postponement notice must be issued to the employee within 6 weeks and 1 day of the chosen date.
The employee can usually decide to opt in during the postponement period if they would like to.
Phased auto enrolment is known as ‘phasing’ or ‘staging’. In the UK, by February 2018, all employers would have passed their staging date and are required to enrol their employees unless the employee decides to opt out.
There are two types of re-enrolment, cyclical and immediate. If an eligible job holder decided to opt out before the staging date or ceased membership at a later date themselves, the employer must put them back in the scheme on a periodic basis. This is cyclical re-enrolment and can happen every 3 years. The employer could decide to re-enrol job holders on an annual basis instead of a 3 year cycle. The re-enrolment window is normally 3 months before the staging date to 3 months after the staging date. In the UK, all employers were given their staging date by April 2017.
National Employment Savings Trust (NEST) UK
NEST is a master trust based scheme set up by the government to offer all employers a suitable workplace pension and is specifically designed for automatic enrolment. Other main master trust based schemes include NOW Pensions and The Peoples Pension. Only NEST has to accept all businesses, the others do not have to offer terms if they feel it will not be profitable. There is no upper limit on NEST currently because it was removed on 6th April 2017.
NEST charges are 0.3% pa plus 1.8% on contributions paid. Default funds are target dated. There are approximately 50 target based funds which match the member to a projected retirement date. Target funds are normally named by the year the fund will mature. For example NEST 2035 is a fund that is specific to individuals with a projected retirement date of 2035.
We can look at these target dated funds in 3 stages:
1) Foundation phase – (5 years). This period is aimed at helping younger members develop a pension savings habit in their early working lives.
2) Growth phase – (30 years). This period is aimed at focusing on steady growth in real terms by investing in growth orientated funds with a long term volatility of around 10-12%.
3) Consolidation phase – (10 years). This period is aimed at gradually reducing the portfolio volatility by switching into lower risk assets to help protect the portfolio from large falls in the market.
Pros and Cons of workplace pensions
The most important benefit of workplace pensions if for the employee because they will have a pension that can facilitate retirement income if they ‘opt in’. This can be an addition to any state pension the member may have and may help to create a better standard of living during retirement. This can be especially helpful if there are future changes to the state pension system. An example could be higher retirement ages. Currently scheduled to increase to 67 in 2020 and to 68 between 2026 and 2028.
A benefit to the employer could be better staff retention due to the scheme contributions and employers matching the member contribution up to a certain percentage. This means companies can be competitive in terms of the pension they provide which is an important part of employee benefits package.
A drawback could be, if pension contributions will directly effect the employee’s take home pay or if employers cut back on pay rises to compensate for their defined pension contributions. The ability to opt out means that an employee may choose to take home slightly more pay and have a much lower ability to provide for themselves in retirement. The other danger is that mandatory pension contributions could lead to financial pressure for businesses and result in company closure (higher unemployment) which could cause issues for the economy.
If you are thinking about retirement, speak to one of our advisers to find out what your best options are.