Most of us are aware of the need to improve retirement savings across the economy and there is no doubt that employers are facing renewed focus on their role in pension provision.

In the March 2023 Budget, pensions issues took centre stage: more evidence that the Government is attaching increasing weight to the importance of encouraging people to save properly for their retirement.

Men and women, on average, are expected to live in retirement until ages 80 and 83 respectively. Now that the State basic pension now at £203.85 per week, a government, regardless of party, needs now to refocus on how pensioners will receive the lion’s share of their income in retirement. 

Auto-enrolment

In 2012 auto-enrolment was introduced - the legal duty on all employers to enrol employees into a workplace pension arrangement – and most would agree it has been a success.

According to Department for Work and Pensions data, since the introduction of compulsory workplace pensions saving in 2012, total annual contributions have increased from £81.7 billion to £114.6 billion in 2021. At the same point, the workplace pension participation rate in the UK had risen to 79%: that’s 22.6 million employees.

However, post-pandemic figures seem to indicate that people are still not saving sufficiently for retirement. Since the pandemic, somewhere around 600,000 people have left the workforce and become economically inactive.

Early retirement, certainly from the age of 60 plus, has been seen as becoming a realisable ambition, much more so than previously from that group. According to the Office for National Statistics such people have a financial resilience, with 66% owning their homes outright and 61% likely to be debt free. 

There are now signs that the cadre of 50–60-year-olds, with ambitions of becoming economically inactive before retirement age, don’t actually have the financial resilience they thought they had and are returning to the workplace:

• only 49% of those aged 50-54 are likely to be debt free, excluding a mortgage
• only 38% of those aged 50-54 years are confident their retirement provisions will meet their needs and
• 86% of those aged 50-54, and 65% of those aged 55-59 are likely to say they would consider returning to work (against 44% for those 60-65) 

Increasingly, people are looking to retire earlier than they thought perhaps five years ago: the ambition is still there, but they don’t yet have the necessary financial resilience. 

There are changes coming

The drive to improve workplace savings will continue and the burden will fall on employer. The Government and the Pensions Regulator (“Regulator”) have made clear their drive to increase access to workplace savings and at the same time focus on employers’ compliance with their auto-enrolment duties.

What about the expansion of auto-enrolment?

The Pensions (Extension of Automatic Enrolment) Bill, which had its first reading in the House of Lords in March, will have the effect of extending the definition of ‘eligible jobholders’ to employees aged 18-22. Currently employers are only required to auto-enrol employees aged 22 and over, up to the State Pension Age. The change will directly result in a greater number of employees having the right to be auto-enrolled, with a consequent increase in employer contributions and compliance issues.

In addition, the Bill looks to remove the lower limit for qualifying earnings. Currently employers are required to make pension contributions calculated only on an employee’s qualifying earnings between £6,240 and £50,270. As drafted, the Bill will have the effect of reducing the £6,240 lower limit to zero, with the result that employer (and employee) contributions will have to be calculated on an increased level of qualifying earnings.

Increasing levels of compliance

Throughout the past eleven years, in fact since the introduction of employer duties to provide access to workplace pension savings and to automatically enrol workers into those schemes, many employers have become unsure whether they are doing so correctly. 

The Regulator has the power, under the Pensions Act 2004, to visit an employer on-site to determine if is complying with all the employer duties imposed by the auto-enrolment legislation. Unfortunately, according to the recent survey, only 13% of employers surveyed are currently not confident that they would pass one of the Regulator’s auto-enrolment spot checks. 

Compliance failure can result in significant sanctions for employers:

• fixed penalty notice – where the Regulator finds that an employer has failed to comply with its duties it will issue a statutory notice to comply with those duties and/or pay any missing or late contributions to its pension scheme. Failure to comply with a statutory notice may result in a fixed penalty notice of £400
• escalating penalty notice – continued failure to comply with a statutory notice may result in an escalating penalty notice. The notice gives a deadline for compliance, after which the employer may be fined at a daily rate of £50 to £10,000, depending on the number of employees. The fine will continue to grow at the daily rate until the employer complies with the statutory notice
• Prohibited recruitment conduct penalty notice – where the Regulator finds that an employer’s recruitment practices are determined by reference to a potential recruit’s likelihood, or otherwise, to opt out of auto-enrolment a separate penalty notice may be issued. The fine is levied at a rate of £1,000 to £5,000, depending on the number of employees
• Reputational damage – a list of companies against whom sanctions have been issued are published on the Regulator’s website

The Money Purchase Annual Allowance

In a drive to encourage people back to work and continue saving for retirement, the recent Budget included an increase in the Money Purchase Annual Allowance (MPAA).

Budget headlines were grabbed by tax changes focused on high earners, while the level of the MPAA is an issue of relevance to many more people, and employers, as it relates to more modest pension savers in defined contribution pension arrangements, such as most auto-enrolment schemes. In addition, it is most likely to be impact those in their 50s who have recently accessed their pension savings as a way to fund early retirement from the job market, but who may now be looking to return.

The MPAA is the restriction on the amount a member of a money purchase pension scheme may contribute annually to a pension arrangement once they have accessed their pension savings, without incurring a punitive tax charge.

Following the removal, in 2015, of restrictions to how money purchase scheme savers could access their retirement funds, members have been allowed to take lump sums from their scheme, or take retirement income, but still contribute to those schemes and continue to build up retirement savings. That meant that many people accessed part of their pension savings, perhaps to pay off a mortgage or to pay for children’s education, while still continuing to work and save for their retirement.

Until 2017, such savers were able to do so as the MPAA was set at £10,000 per year. That was changed in the 2017 Budget to £4,000, significantly restricting the amount a person could save for retirement once they had accessed part of their retirement savings, without triggering a charge of up to 45% of the excess contributions.

Following the change announced in the Budget, the MPAA will again be set at £10,000 with effect from April 2023. This has been seen as a positive move to attract back to the workplace many of those who have become economically inactive since what is sometimes referred to as “The Great Resignation”.

How might the future look?

As the Government continues to focus on all aspects of pension provision at the workplace – from transition to net-zero in selected funds, through proper governance and member communications, to demands for increased contributions – the compliance matrix for employers will continue to expand.

Pushing workplace pensions increasingly to the fore as the answer to bridging the income gap in retirement is a laudable aim, but employers will need to be vigilant that they are up to the challenge.