Is the auto-enrolment minimum enough for your staff?
For many employees, particularly those on lower pay, the auto-enrolment minimum is unlikely to deliver a comfortable retirement on its own. While it meets employers’ legal obligations, and the State Pension will provide a significant part of retirement income for the lowest earners, minimum contributions build only modest pension pots. They are also unlikely to give a business a competitive edge when it comes to attracting and retaining good people.
Most business owners would say that their people are the business, and losing a good member of the team can do far more damage than any piece of equipment breaking down. Replacing them takes time and money, and in some sectors finding the right person can be hard work. Pay is the obvious lever, but it is not the only one, and a workplace pension is one benefit every employer already has in place.
In a hurry?
The auto-enrolment minimum keeps an employer within the law, but for many lower-paid staff it builds only a modest pension, and it is unlikely to help a business stand out when it is trying to keep or attract good people. This article explains what the law requires, why the minimum falls short for lower earners, how a pension fits into recruitment and retention, and what going further can involve.
Speak to a specialist adviser →The cost of employing people has risen in recent years, not least because of higher employer National Insurance contributions. It is understandable, therefore, that many businesses want to keep pension contributions at the legal minimum. But that makes it all the more worth revisiting the decision. Employer pension contributions are generally free of employer National Insurance and do not count as taxable income for the employee, whereas the same money paid as salary generally attracts tax and National Insurance. More of each pound therefore reaches the employee’s pension than would reach their take-home pay, although pension income is usually taxable when it is drawn.
This article looks at what the minimum involves and what going further can do for a business:
Sources: GOV.UK: Workplace pensions for employers | GOV.UK: What you, your employer and the government pay | GOV.UK: Leaving your workplace pension scheme | DWP: Analysis of Future Pension Incomes | DWP: Analysis of Automatic Enrolment saving levels | GOV.UK: Tax on your private pension | HMRC: Salary sacrifice and the effects on PAYE | DWP: The charge cap
What does auto-enrolment actually require of an employer?
Employers must automatically enrol eligible employees into a qualifying workplace pension scheme and contribute towards their pensions. Eligibility depends mainly on age and earnings, although employees who do not qualify for automatic enrolment may still have the right to join a scheme, with employer contributions required in some cases.
The law sets minimum contribution levels for employers and employees. Employers can choose to contribute more, reducing the amount employees need to pay themselves, provided the overall minimum is met. By default, contributions are calculated on earnings within a specified band, rather than on an employee’s entire salary.
Employees can opt out of the scheme, and those who do so within the first month are entitled to a refund of their contributions. Employers must generally re-enrol eligible employees who have opted out every three years, subject to certain exceptions. They must not encourage employees to opt out and must also meet their ongoing administrative obligations, including notifying staff, keeping records and submitting a declaration of compliance to The Pensions Regulator.
Is the auto-enrolment minimum enough for lower-paid staff?
For lower-paid staff, the auto-enrolment minimum provides a foundation for retirement saving, but it is unlikely to build a substantial pension pot on its own. Because contributions are normally calculated on earnings above a threshold, rather than on the full salary, the earnings excluded from the calculation represent a larger proportion of a lower-paid employee’s income. The result is that less goes into their pension than the headline contribution rate might suggest.
The State Pension provides an important part of retirement income for lower earners, but it does not necessarily close the gap. Government analysis suggests that many people in the lowest earnings band are not on course to achieve even the minimum Retirement Living Standard published by Pensions UK (formerly the Pensions and Lifetime Savings Association). Separate government research has also found that most low earners save at or close to the auto-enrolment minimum.
For employers, paying more into a pension is a practical way to demonstrate that they value the people who keep the business running, particularly when larger pay rises are difficult to afford. It helps employees build greater financial security for the future while showing that the business is thinking beyond the next payroll run.
Found this useful?
Once a month, we send our latest articles on pensions, investments, mortgages, protection, estate planning and more, along with a couple you might have missed. Practical reading for anyone taking their finances seriously.
Join our readers →Does a better pension help you recruit and keep people?
A better pension can help a business attract and retain staff, but its value as a benefit depends on whether employees understand and appreciate it. For younger staff and those on tighter budgets, take-home pay may be a more immediate concern than retirement income decades away. An extra percentage point in pension contributions may mean little to them unless the longer-term benefit is made clear.
For senior and experienced staff, the picture can be different. Employer pension contributions may form part of the overall remuneration package, and candidates weighing up competing offers may consider them alongside salary and other benefits.
Industry also matters. Employers compete with others in their sector for the same people, and pension provision varies considerably across the economy. Government analysis of automatic enrolment shows that employers in finance and insurance tend to contribute well above the minimum, while staff in accommodation and food services are much more likely to save at the minimum level. Smaller employers are also more likely than larger businesses to stick to the minimum.
For businesses whose workforces are predominantly lower-paid, offering more than the minimum can therefore help distinguish them from competitors. The key is to make sure employees understand what the additional contribution means for their financial future.
What does going beyond the minimum look like?
Going beyond the minimum does not necessarily mean a large increase in cost. Employers can raise their contribution rate or calculate contributions on an employee’s full salary rather than just the qualifying earnings band. The latter can make a particularly significant difference for lower-paid staff, because a larger proportion of their salary is included in the calculation.
Another option is to match employees’ contributions up to a set limit. This rewards those who choose to save more, although it offers less to employees who stick to the minimum. A higher employer contribution, by contrast, can benefit everyone covered by the arrangement without requiring them to increase their own payments. The right approach depends on the workforce and the outcome the employer wants to achieve.
Salary sacrifice can offer another way to structure pension contributions efficiently. An employee gives up part of their salary in exchange for an additional employer pension contribution. This can reduce National Insurance costs for both parties, and the employer can choose to pass some or all of its saving into the employee’s pension. However, the arrangement must be set up carefully, taking account of the rules governing National Insurance relief and ensuring that an employee’s pay does not fall below the National Minimum Wage.
Contribution levels are only part of the picture, however. Employers should also consider whether their pension scheme offers good value and meets the needs of their workforce. Provider charges, investment options, the default fund in which most employees’ savings are invested, member services and the tools available to track retirement savings can all vary. A scheme selected when automatic enrolment was first introduced may therefore be worth reviewing.
Most charges on the default funds of auto-enrolment schemes are subject to a legal cap, but that does not mean all schemes offer the same value. Reviewing the scheme alongside contribution levels can help employers ensure that the money they and their employees pay in is working as effectively as possible.
Is your workplace pension doing enough for your staff?
Our Chartered Financial Planners help employers review their workplace pension, set contributions the business can sustain and explain the benefit to staff. Find out how we work with clients across the UK.
Auto-enrolment pensions →How can a financial adviser help with your workplace pension?
A financial adviser can help an employer build a pension offer that works for both the business and its employees. This starts with reviewing the existing scheme, comparing charges, investment options and service with the alternatives, and identifying a contribution structure the business can afford and sustain over the long term.
But a good pension offer is only part of the equation. Employees also need to understand its value if it is to make a difference to recruitment and retention. An adviser can help communicate the benefits in practical terms, whether through presentations, written guidance or one-to-one sessions, giving staff a clearer picture of how their pension can support them in retirement.
An adviser can also help the employer with its ongoing responsibilities, from managing re-enrolment and meeting reporting requirements to assessing whether salary sacrifice is appropriate for the business and its workforce. Taken together, this can help employers make informed decisions about their pension provision, get more value from the scheme and ensure employees understand what it offers.
What's next?
Auto-enrolment sets the legal minimum for workplace pensions, but for many businesses, that is a starting point rather than the limit of what they can offer. The right approach depends on your workforce, your sector and what the business can afford to sustain. Understanding where a more generous pension could make a difference is a good place to start.
Our Chartered Financial Advisers offer a free initial consultation for employers looking to review their workplace pension, explore the options for going beyond the minimum and understand what a more generous pension offer could mean for their business and employees.
We work with clients across the UK. Locally, we advise clients throughout Kent and East Sussex, including Tunbridge Wells, Sevenoaks, Maidstone, Tonbridge, Crowborough and Eastbourne.
This article is for general information only and does not constitute personal financial advice or a recommendation. The suitability of any investment approach depends on individual circumstances, objectives and the current regulatory environment. Tax treatment and investment rules can change over time, and their effect will depend on personal circumstances. Investments can go down as well as up, and you may get back less than you invest.
