I want to save for retirement but I can’t afford to pay

Martin Lewis has spoken out about the Don’t Pay UK campaign

Should we be encouraging people not to pay their fuel bills in October- Martin Lewis told Robert Peston earlier in the month that we shouldn’t.

“We are getting close to a poll tax moment on energy bills coming into October and we need the government to get a handle on that because of course once you get to that it’s exponential the problems that start to happen.”

Should we be encouraging people to opt-out of workplace pensions? Inciting opting out of auto-enrolment is against the law. Some people are saying that we should

Now I don’t want to see John Ralfe getting marched off to prison so in his defence, I’ll point out that his motivation is sound.

But we have to tread carefully.

I’ve argued in this blog that we should be making it easy for people to prioritise paying bills over pensions but have stopped short of encouraging people to opt-out. I’ve quoted the Pension Geeks.

But there is something more that conscientious pension savers can do , to help themselves and that’s to ask their employer to keep contributions going. I have looked into this and have got some help from experts. Here are my thoughts – and those of people who I know to be acting in the best interests of savers.

If you aren’t able to afford your pension contributions – read this!

There are millions of people who are saving for retirement who will struggle to pay their bills this year. There is a school of thought that says they should just pause their pension contributions.

Normally this would be considered an opt-out and would trigger the employer pausing their contributions. But it doesn’t have to be this way. An employer can choose to continue to pay contributions for the member. If you can convince your employer to treat you as if you were still paying , things are different.

Firstly, when an employer continues to pay , this is not an opt-out, as that would mean ceasing membership. It’s the member voluntarily choosing to reduce their contributions (I think we used to say taking a “pensions holiday”). This would be subject to the scheme rules allowing this (some schemes might not, which could force a real opt-out).

Assuming, the employer is not increasing their contributions and is only paying the employer minimum (i.e. if the total contributions drop below the statutory minimum), then the worker would become an active member of a non-qualifying scheme.  This worker would need to be reassessed at their employer’s next re-enrolment date  and, if eligible, “re-enrolled”, so that the total contributions are at or above the statutory minimum.


There is a subtlety in approach here.

A friend and former regulator gave me this opinion.

Providing the employer’s offer to continue paying their contribution is not too overt, I doubt that this would be considered an inducement by TPR, given the employer is not saving any money by offering this.  For example, “burying” this offer in the small print of the pensions paperwork, or only explaining it if a member specifically asks to opt out or reduce their contributions, would seem reasonable .

Whereas, a pro-active “marketing” campaign explaining the offer to all their employees (even in this harsh economic climate) would not be advisable.

TPR  does not have the power to turn a blind eye (if they found out about an inducement or other non-compliance), they will generally focus their resources and enforcement activities on the areas where there is the most risk of detriment to the worker.

I have received further responses via friend to this blog- Mark Ormston. It is consistent with what you have just read.


Response 1

I am by no means an expert, but…Under auto-enrolment legislation, I imagine if the member ceases paying contributions themselves then they will have opted-out and will therefore not continue to be “enrolled” in their scheme.  The employer could continue paying on their behalf for as long as they wanted, but the member would have to opt-in again at some point in the future or be re-enrolled at their next suitable review point in order for their contributions to restart.  That should mean members don’t miss out on contributions or investment growth – but they won’t get tax relief on contributions.

 

The alternatives would be for the employer to consider making an additional salary payment to the member equal to what they would not be paying into their pension – although that would be complicated as it might affect pensionable salary!  Employers might also have to think about any impact there might be on staff who are no longer actively contributing to a pension scheme (although nothing obvious springs to mind).


Response 2

Had a chat with our DC consultancy team to a) run my thoughts by them and b) seek clarification.

Can it be done?

Simple answer is yes, but strictly speaking it is not an opt-out [re: auto-enrolment] if they have been in the scheme for over a month. As my colleague put it to me, they would become a ‘Non qualifying member of a qualified pension scheme’.

I do agree that the rules/policy should be checked.

I also agree with the point made that they will be re-enrolled at the next review date [so, contributions will increase back to minimum legislative levels] and the member will then have a choice to make.

Other consideration

  • My colleague said the employer should be careful with this as they may be setting a precedent that could have unintended consequences. For example, if allowed, more members may request this.
  • My colleague also mentioned considering whether the fundamental basis of the scheme will be changed if this is allowed.

Why employers should exercise discretion

Encouraging pausing contributions increases take home and eases pressure on wage rises. It could be construed , if used extensively as a way of getting out of paying cost of living increases to wages.

It is potentially an inducement to opt-out as the employer is not contractually obliged to pay to a member’s “non qualifying pot”. Ceasing employer payments in future would create an opt-out . Mass pausing of contributions is likely to create an issue for TPR who may be forced to act against the employer.

It reduces the long-term prospects of each saver, of retiring as they would choose.

So why should employers consider continuing to pay?

 

The answer is in the second tweet. Employers who are concerned for the financial well-being of staff should do what they can, when they can.

 

The Regulator should provide guidance here.

It is however a matter for The Pensions Regulator to show its hand here. So far, its only pronouncement on cost of living was to warn providers of the risk that people using their pensions to pay household bills were at risk of being scammed.

The cost of living crisis is very real and it’ upon us now. It is no use TPR hanging on for ever, it should give clear guidance on what employers can do and a red line over which they cannot tread.

John Ralfe can sleep easy at night so long as he’s advocating this well articulated position

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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