Next week most staff will see for the first time the impact of their increased pension contributions on their pay. They may ask you, if you are the boss or run payroll or pensions or work in HR, what this is all about. This is a little article published in this month’s reward strategy, that might help.
I cast my mind back to 2012 when Marks and Spencer decided they would avoid phasing and set the employee contribution high. The idea was that they would have a high opt-out rate and targeted contributions to those who cared about pensions. The strategy was a failure, Marks and Spencer ended up with a similar opt-out rate to everyone else and they ended up fully funding AE contributions for more than six years longer than they needed.
The M&S experience suggests that if your worry is that you will have a high level of opt-outs this month, then the evidence is against you.
If your worry is that the overall reward bill will not be reduced by opt-outs, you may have a right to be concerned. If you haven’t already done so, you may wish to think about pensions salary sacrifice. What you should not be doing is telling your staff that they should be opting out! But you knew that anyway!
Let’s take a step back and stop worrying. What is actually happening? This is a clip from the Pensions Regulator’s website
And remember that minimum contributions don’t start at £1 and are capped. For the 2018/19 tax year this range is between £6,032 and £46,350 a year (£503 and £3,863 a month, or £116 and £892 a week).
If you tell your staff nothing else, tell them the facts. If your scheme pays more than the minimum, be prepared to explain to people how much more.
If you are paying the minimum, sell the minimum for what it is – it is a pay rise, albeit contingent on employees paying more and a pay rise with deferred gratification.
For anyone on £46,350 or more it’s another £400 pa, the maths isn’t hard, sell them the pay rise – it’s the sausage and it sizzles!
As for that increase in employee contributions, remember that basic rate taxpayers only feel the impact net of tax (and it’s softer still if you do salary sacrifice and/or pay higher rate tax.
Sadly, the people who will be hurt most by the increase, are the people who need cashflow most, the low-paid who don’t pay tax and have to pay the full 5% without a Government incentive. If you are operating a workplace pensions on net-pay (where relief at source doesn’t apply), and you have a number of people auto-enrolled but not paying tax, now is the time to consider moving to a GPP or NEST or People’s Pension – all of which will give these staff a 25% discount on their contributions.
So let’s look at your most vulnerable employees, the people who really are needing every penny of their pay packet. You probably know who they are because they are the ones who are doing payday loans, suffering financial misery and struggling. If you know your vulnerable staff are, and they are still contributing to their pension, then you really must make sure they are getting the tax-breaks the Government promised them when they still advertised auto-enrolment as 3+4+1 (when 1 was from HMRC).
I suggest that you run a report on opt-outs in April, May and June. Those who are opting-out on hardship grounds are people you need to watch-out for, those who simply don’t want to save will be few and far between.
People are naturally inclined to save and most people are going to welcome this hike in their pension savings. I say this from personal experience! There are several times in my career where I have had the choice to opt-out of pensions and once when I had to opt-in. I remember the pain of opting in and the relief when I saw the pension contribution I was making when I didn’t opt-out!
The reality for most people is clear, they are not saving enough and they know it. Most people will welcome paying more, even if they moan. It’s a bit like rain when the garden’s parched!
My colleagues in pensions fall into two categories, those who predict disastrous opt-outs when people see their pension contributions go up, and those who moan we aren’t compelled to pay 12% of salary (like they are in Australia). Both positions are unhelpful. AE contributions are what they are – they are the law – we had best make the best of them.
So when my (well-paid) staff come moaning to me on 26th April when they next get their payslip, I’ll tell them to stop whingeing and keep saving; harsh but fair!