The Dramatic Change in Workplace Pensions
The issue of workplace pensions has been in the spotlight for a number of years, and in more recent times new reforms have raised the profile of pensions still further. What changes have taken place and what does it all mean?
Why pension reforms were needed
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According to Gov.UK millions of people are not saving enough for the income they are likely to need in retirement. With life expectancy increasing, many workers are saving significantly less into their pensions in real terms.
The government has introduced pension reforms to encourage people to save for their retirement.
What are the reforms?
The new pension reforms are being driven by automatic enrolment. According to the Pensions Regulator every employer with at least one member of staff now has new duties, including enrolling those who are eligible into a workplace pension scheme and contributing towards it.
The first phase of the reforms began in 2012, with the programme set to continue until 2018. As one of the most significant regulatory changes to pensions to hit the UK in decades, government ministers believe the reforms will double private pension income by the time people currently starting their working lives reach retirement.
Since an employer is required to automatically enrol eligible employees into the pension scheme, it is thought that millions of workers who may have never have considered setting up a pension will now benefit from these employer-driven schemes.
Implications of the pension reforms
Automatic enrolment is dramatically increasing participation in pension schemes, which has a positive benefit for thousands of workers who are eligible. The Office for National Statistics (ONS) has already released data which confirms the part that auto enrolment is playing in improving pension participation. 59% of employees now have a workplace pension, compared to 47% last year.
However, the reform of workplace pensions for employers is a complex and costly affair, with experts recommending that businesses should prepare at least 18 months before their staging date. The extra administration involved may cause a headache for smaller businesses in particular, so gaining expert workplace pensions advice can be critical to ensure that they comply with the rules in good time.
Although workplace pensions may have grown, much of this due to auto enrolment. What statistics have also revealed is that the actual contribution levels have reduced. Last year, around a third of employees with workplace pensions contributed less than 2%, compared to 11% the year before. Some experts believe that these figures are misleading, however, and that falling contributions are due to an influx of members at auto enrolment minimum levels, rather than those already in schemes choosing to contribute less. Experts argue that in order to achieve a good level of income from a pension, contributions need to be around the 8% mark or more.
Statistics have also revealed that there is a discrepancy in member contributions between those who work in the public and private sectors. In particular, the employee contribution rate in the public sector was significantly greater in 2014 compared to the private sector for percentages of 7% or more. Just over 10% made up the employee contribution rate in the private sector, whilst this figure rose to almost 50% in the public sector.
Whilst private sector contributions may dwarf public sector contributions in percentage rates of below 4%, once you hit the 5% figure and over, it is the public sector which dominates.