Pensions - Articles - Post auto-enrolment contributions expected to fall by half

 Post auto-enrolment pension contributions are predicted to fall by almost half (48%)1, according to Buck Consultants1. Whilst auto-enrolment is a positive step in encouraging people to save for their pension, research by Buck finds many employers intend to meet obligations in the least expensive way possible and contribute the minimum.

  

 Despite most companies (82%) saying that having a better than average pension scheme is important for attracting and retaining staff, the study found that in reality employers are unlikely to budget for enhanced pensions packages as the additional cost which would be involved comes at a time when budgets are already being squeezed by an austere macro environment. Almost a third of companies (31%) said they will meet their auto-enrolment obligations in the least expensive way possible and 25% have already made the decision to pay the minimum contributions required. Only 40% have decided to pay more for everyone and 16% said they would ‘level down’ and contribute the minimum for everyone.

  

 Philip Smith, Principal & Head of Defined Contribution & Wealth of Buck Consultants, said: “We’re facing a double-edged sword, with winners and losers as a result. Pension provision is at a low level so auto-enrolment is certainly a positive step forward in encouraging people to save for retirement. However, some employees could in fact find themselves worse off than they would have been before auto-enrolment if employers simply contribute the minimum. We urge all employers to look at their level of contribution. Our calculations show that minimum contribution rates should be doubled in the future if adequate pensions are to be provided3, and employers should take their responsibility to provide adequate pensions to their employees seriously. Otherwise the onus will fall back to the individual.”

  

 Impact on contribution payments and replacement incomes
 The typical defined contribution (DC) ‘pre-auto-enrolment’ was around 12% per annum of basic salary of which 6.5% was paid by the employer4. If, post-auto-enrolment, the typical DC contribution reduces to 8% of qualifying earnings5 (the auto-enrolment minimum), for median UK earners6 this will reduce effective contribution rates to 6.3% per annum of basic salary.

 
 This means that the auto-enrolment minimum employer contribution for a 22-year-old on an average salary of £26,200 will, in a steady state, work out at around 2.4% of earnings in comparison with the typical 6.5% currently paid – a 63% decrease.

  

 Figures 1.1 and 1.2 below illustrate the difference in expected retirement income as a result of this change in contributions.
  

 

 Assuming the Government introduces the flat rate pension of £144 per week, pre-auto-enrolment contributions would produce approximately £281 per week. Post-auto-enrolment, the approximate retirement income would be £215 per week – which is 77% of the expected pre-auto-enrolment provision.

  

 Making pensions a priority
 Interestingly, the study found that the primary objective for auto-enrolment for a healthy 52% of companies is to review their whole remuneration package. Buck suggests a re-distribution of investment in company benefits could perhaps offer a way forward.

  

 Looking at the impact of an additional 1% of base salary contribution on gross pension income, Buck estimates that a contribution of 12% per annum of base salary will generate an income of 27% per annum of base salary. So every additional 1% will add a further 2.25% of pension income (see Figure 2).

  

 

  

 Taking a typical management level employee and using a broad estimate based on pricing of flexible benefits arrangements, Buck’s calculations reveal how much companies are spending on benefits and approximately 13% of base salary is spent on non-pension benefits (see Figure 3a and 3b). The study shows that although there is some evidence that ‘other benefits’ will suffer as a result of the new employer obligations, it is clear that pension contributions themselves will also be reduced (see Figure 4).

  

 

  

 

  

 

  

 Smith continues: “The importance of pension provision is being relegated due to the popularity of other discretionary benefits, which is a far cry from the aspirational claims of most companies. There is no doubt they must offer benefits to attract and retain employees but there should be a balance between immediate and deferred reward. We believe firms need to take their auto-enrolment responsibilities very seriously and, where appropriate, consider transferring spend from non-pensions benefits to pensions benefits or some other form of saving.”

  

 Smith concludes: “Investing in the provision of a good pension scheme will ultimately play a part in attracting the next generation of talented employees, as employees become more aware of the importance of ensuring that they are able to enjoy their retirement. Companies need to review their pension schemes as a talented workforce is essential for the growth and development of any business.

  

 “Understandably, the process of auto-enrolment and reviewing reward packages for all staff is going to take time and money, but it will be worth it in the end. Nearly half of firms (49%) with a staging date within the next 12 months are still in the process of working out how they will budget for costs, whilst one in ten (11%) do not know, or have not begun thinking about budgeting for costs at all. It’s time for these companies to get their skates on and start taking action.”

  

  

 1 Opinium Research carried out a survey of 100 individuals working in private sector firms with 500+ employees, who are responsible for their company’s progress on auto-enrolment compliance:
 • Smaller companies [500-1000 employees]: 70 respondents surveyed
 • Larger companies [1000+ employees]: 30 respondents surveyed

 2 The typical defined contribution (DC) ‘pre-auto-enrolment’ was around 12% per annum of basic salary of which 6.5% was paid by the employer4. If, post-auto-enrolment, the typical DC contribution reduces to 8% of qualifying earnings5 (the auto-enrolment minimum), for median UK earners6 this will reduce effective contribution rates to 6.3% per annum of basic salary. Decrease from 12% to 6.3% = 47.5%

 
 3 Someone aged 25 currently earning £30,000 p.a., for example, could expect to receive a pension, in today’s terms, of £5,000 from auto-enrolment. Assuming a basic State pension of £7,7,488 the total pension would be £12,488 p.a. which would provide a post-tax income of less than £1000 per month. If the auto-enrolment rates were doubled, however, total retirement pension would be more than £17,000 p.a. This would represent 57% of pay for a more adequate replacement ratio than the 40% provided by auto-enrolment.

 4 NAPF Annual Survey 2011 (actual figure for typical defined contribution (DC) ‘pre auto-enrolment’ was 11.7% per annum of basic salary)

 5 These earnings (which include salary, wages, commission, bonuses, overtime, statutory sick pay and statutory maternity, paternity and adoption pay) are used to identify whether an individual is an eligible jobholder or a non-eligible jobholder, and also to determine the level of contributions a scheme must require (The Pensions Regulator, 2012)

 6 Based on median earnings of £26,200 (Annual Survey of Hours and Earnings, Office of National Statistics, April 2011).

 7 Figures are conservative based on a 22-year-old earning the median salary of £26,200 (Annual Survey of Hours and Earnings, Office of National Statistics, April 2011), and assuming a flat-rate pension of £144 per week is implemented by the Government

 8 In reality these figures are significantly skewed by the proposed change in state benefits (the government has proposed a flat rate pension although no date for implementation has been announced).