26th February 2013

Aegon: Pension scheme membership in the doldrums

On the eve of auto-enrolment no-one had any doubt that workplace pension savings was in the doldrums and was in desperate need of a hurricane force gale to push people back into the savings habit. This was clearly demonstrated by the Office for National Statistics’ (ONS) 2012 Annual Survey of Hours and Earnings: Summary of Pension Results published last week. This wasn’t happy reading. Membership of workplace pension schemes has sunk to 46% of UK workers, its lowest level since 1997 when it reached only 55%.   

The fall in membership has almost exclusively taken place in the private sector. Public sector pension employees are significantly more likely to be in a pension scheme than private sector employees. The 2012 statistics make astounding reading, with 83% of public sector employees in workplace pension schemes,   compared to only 32% of private sector workers. The vast majority of public sector employees are in defined benefit schemes, unlike the private sector where only 28% of employees have this luxury, a fall from 46% in 2012. Of course private sector defined benefit schemes have been in decline for many years. It’s this decline which has largely driven the reduction in workplace pension membership. The better news is the increase in GPP and stakeholder scheme membership from a lowly 1% in 1997 (before stakeholder) to 10% in 2012. And this trend is set to continue.

For defined contribution schemes the key to achieving a good income in retirement is the contribution level - starting early, not giving up, and paying as much as you can for as long as you can. But few private sector employees are contributing enough – in 2012 only 36% of pension scheme members made pension contributions of more than 5% of their earnings, with around the same number contributing less than 3%. Employers also play a hugely important role; commonly they tend to pay contributions between 4% and 8%. 

The ONS survey is a timely reminder that more needs to be done to achieve a decent income in retirement. Automatic enrolment will be the stimulus to begin changing this, but it won’t be the panacea. So far only the very largest employers have started to auto-enrol their workers, and the early signs appear to be good, with reported opt-out rates of between 5% and 30%. But many employees and their employers will only be paying the phased in contributions rates (currently 2% of qualifying earnings), significantly below the level needed. And some employees are bound to leave the scheme in the months after the opt-out period. Others may leave once the phased in contributions start to increase.

The UK really needs workplace pension reform to succeed if people are going to avoid poverty in retirement. Both membership and contribution rates need to increase – rapidly. This is why it’s absolutely critical that employers get help, not only to navigate the auto-enrolment regulations compliance minefield, but also to encourage them to go that extra mile to help secure their employees’ financial futures. Doing the minimum won’t be enough. And this is where the adviser comes in. Advisers can provide real value to both employers and employees. Not only do advisers help employers with their pension scheme selection they can also encourage higher employer contributions and tailor the investment solutions to the workforce, including the default investment fund and negotiate scheme charges. They can also provide membership support via generic worksite presentations demonstrating the value of the pension scheme and encouraging employees to keep on saving and pay higher contributions.   

But of course advice has to be paid for, and not every employer is willing or can afford to pay for advice. The FSA recognised this when it introduced the concept of consultancy charging. Banning consultancy charging will, for many employers, make advice inaccessible. And this, in turn, could undermine the success of workplace pension reform leading to poor membership rates and low contribution rates.   

Kate Smith

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Pensions