Sunday, 8 October 2017

Workplace Pensions

In 2008 the government introduced new pensions laws designed to get people saving. The idea is to help people to save by giving them access to a workplace pension scheme so they don’t have to rely on just the State Pension.

Workplace pensions were launched back in October 2012 to address the problem of people living longer but failing to save enough money for retirement. It is aimed at the private sector where less than 25% of the workforce were saving for retirement compared to over 90% enrolled in their employers pension scheme in the public sector.

Under the new rules, every employer has to give their workers the opportunity to join a workplace pension scheme that meets certain standards. Depending on how old they are and how much they earn, many workers will be automatically enrolled into the scheme. Other workers will be entitled to join the scheme if they want to.

Workers earning over a certain amount will also be entitled to a minimum contribution into their retirement pot. It’s usually made up of money taken from the workers’ pay, money paid in by their employer and money from the government, although employers can pay the entire minimum contribution themselves if they want to.

The minimum contribution has been introduced at 2% of a worker's pay. This will rise to 5% from April 2018 and then to 8% from April 2019. Everyone aged 22 yrs and over and earning at least £10,000 per year must be enrolled. So far, around 8 million have been signed up and when the scheme is fully rolled out it is estimated that some 10 million workers will be enrolled in a workplace pension.

Some Providers

In addition to the more established pension providers such as L&G, Standard Life and Aviva, there are some newer providers for employers to consider. Some of the more popular new providers include NEST, NOW:Pensions and The People's Pension.

The National Employment Savings Trust (NEST) is the auto-enrolment programme set up by the Government to support the launch of the auto-enrolment initiative.
NEST is effectively a public body that’s accountable to the Department for Work and Pensions

Most NEST savers are expected to invest their pensions in retirement date funds – also known as target date funds. These are funds that are managed on the basis that you’re most likely to retire in a particular year.

So if your most likely retirement date is 2025, your pension will be invested in the 2025 retirement date fund. If your most likely retirement date is 2055, you’ll be invested in the 2055 fund.

If you’re joining NEST in your 20s, your early contributions will mainly be invested in low-risk assets. Only about 30-40% of your cash will be invested in the stock market. This provision is to protect newly enrolled workers from the shock of a dramatic market fall. 

For example, imagine that NEST invested 90% of all Foundation phase investments into equities. Let’s then imagine that the stock market had a bad year and fell by a quarter. If that happened, there’s a big danger that young savers would be very upset and opt out from auto-enrolment for many years to come.

But if twentysomethings have a lower risk portfolio, they’re more likely to carry on paying into their pension for the rest of their working lives.

NEST is low cost with an annual charge of 0.3% on all your assets plus 1.8% when you first invest the money. So if you invested £1,000 this year, you’d pay a 'contribution charge' of £18, and if your total pot was worth £10,000, you’d pay a £30 annual charge. If you invested a further £1000 next year, you'd be charged a further £18 contribution charge on that fresh investment.

NOW:Pensions  is backed by Danish retirement specialists ATP, which has run the Danish National Pension for more than 45 years. NOW:Pensions has used its experience in Denmark to put together an interesting investment approach. Indeed, there’s just one default investment plan.

Your money is split across five different risk classes including Government bonds, index-linked Government and other bonds, equities and commodities.

During the savings phase, the cash will be invested in the classes listed above through the Now: Diversified Growth Fund. On reaching the pre-retirement phase (ten years before your planned retirement date, though you can change this to five or 15 years before that date) the money will start being moved into less risky investments contained in the NOW: Retirement Countdown Fund.

There’s a 0.3% annual management charge, coupled with a monthly administration fee of £1.50 (which falls to 30p for those earning less than £18,000 a year, at least initially).

The firm behind The People’s Pension is B&CE, a company which has managed workplace pensions – particularly in the construction sector – for more than 30 years. There are three profiles to choose from which will determine how your money is invested: Cautious, Balanced and Adventurous. If you’ve stuck to one of the three main profile funds, your money will automatically be moved into more secure investments on a gradual basis from 15 years before the planned retirement date.

One of the big attractions of The People’s Pension is that it is a not-for-profit organisation, which means that the charges are relatively low – there’s just a simple, flat 0.5% annual management charge to pay. That’s much easier to get your head around than the NEST fee structure of 0.3% per year plus a 1.8% contribution charge.

Some Concerns

Millions are now signed up to a workplace pension but the first area of concern would be that contributions are taken after the first £5,876 of pay is ignored. So, from 2019, someone earning £15,000 will only pay in a total of 4.8% not 8%.

Secondly, the maximum level of income eligible for the scheme is currently £45,000 - no deductions are made on earnings above this figure.

Thirdly, there may be a further 10 million self employed as well as those who work part time and earn under £10,000 or who have several jobs each paying less than £10K and who do not qualify for auto enrolment. The government are currently reviewing the system to find a way to include such workers. It is estimated that as few as 1 in 7 self-employed are saving via a private pension.

I firmly believe the government should take a look at increasing the 8% minimum (4% employee, 3% employer and 1% tax credit) as this is not likely to provide much of a pension for many workers.

Someone earning £15,000 who joins the scheme at age 37 and pays in for 30 years would amass a pension pot of around £75,000. This would be sufficient to give a drawdown pension of just £3,000 p.a.


This much needed addition to help workers save for their retirement is definitely a good start but this appears to be a 'one size fits all' approach where someone in their early 20s will contribute the same proportion of income as a worker in their 40s or 50s. There is a rule of thumb which suggests people should contribute half their age as a percentage into a pension. Someone aged 30 would pay in 15% of their wage and a worker aged 50 would pay in 25% for example.

There needs to be some review process or dashboard which can show every individual what level of payment they can expect based upon the percentage they contribute and the length of time before they expect to take pension benefits from their plan.

In the absence of significant developments to the current system, I suspect many workers will be disappointed with the levels of income in retirement.


If you are paying in to a workplace pension or have any general thoughts please feel free to leave a comment below.

5 comments:

  1. Hi DIY,
    I have to say I think it is a good thing that they have at least started "forcing" people to save - even if at present it is far too low a rate, it is better than nothing.
    I hadn't realised that they were putting such a low percentage of young peoples investments into equities - I understand the logic, but it is going to compound things as they will need to put more and more aside over the years.
    In terms of being the right amount for different people, my hope would be that we get to the stage where this has been in place, unchanged, for the last 40 years and then everyone will be starting to save from scratch. If someone is 50 now and hasnt invested in their pension then the reality is, unless they are a keen FIRE member, it will be too late for them either way.

    I pay into my private pension, work pension and also ISAs to keep me going, and my companies pension is reasonable - so 10% of my pay disappears before I even know about it, which acts as a nice little bonus as you would be surprised (actually, you wouldn't, others may!) just how fast the nest egg grows over the years.
    Cheers,
    FiL

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    1. FiL

      Yes, the low equity allocation applies to the default option for NEST pensions. I think they probably have a choice to select a higher equity fund but I guess most workers will just go along with the default plan. The foundation phase covers the first 5 years.

      For the 50something saver it will be impossible to catch up but if they understand what is required to save enough for a worthwhile amount, they can increase their own contributions or supplement their workplace pension with a SIPP.

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  2. The people who run the company DC pension came to do a presentation the other day. I thought they made a great impact at the start, which was to post up the current full state pension (£8,325.09 pa) and ask 'Who can live on this? Because if you do nothing and don't save for your retirement, that's all you will have, so good luck!' That certainly got the attention of the audience of mostly 20 somethings!

    The £5,876 of pay being ignored is annoying, but if they were to remove it, small businesses would probably suffer as they would end up paying more?

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    1. weenie,

      That's a good opening pitch from the company pension provider, as you say, guaranteed to get people's attention and hopefully get them thinking about saving for the longer term.

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  3. And this is why I am eternally grateful my employer is so generous with their DC pension. They stick in 10% worth of my wage off their own back, whether I pay anything in or not. Plus they match another 7%. They also pay all costs for the platform and funds. Although it is a very limited range unfortunately. Double edged sword though, anytime I think about jumping ship I remember I'm unlikely to get anything like this pension elsewhere at my level.

    ReplyDelete