Pension ‘revolution’ shifts responsibility to employees

Auto-enrolment into pension schemes is set to transform saving for retirement, as Pádraig Floyd explains


The UK is about to enter a period of unprecedented change in the workplace – change that is nothing short of revolutionary.

From October this year, employers will be required to automatically enroll all eligible employees into a compliant pension scheme.

The size of employer dictates when they must actually begin this process, with companies of 800 and more employees being in the first wave over the next 12 months.

But it is not since the introduction of the old age pension in 1909 that there has been such a campaign to drive up levels of income in retirement.

The reason for the government seeking to channel UK citizens into saving through the workplace is simple – without encouragement, we have a tendency to either do nothing or leave it far too late.

The previous attempt at cajoling pension saving – the introduction of stakeholder pensions in 2001 – was an absolute catastrophe. It achieved the worst of all possible results, putting employers through the cost and hassle of implementing schemes, which a decade later have very few, if any, members in them: the legacy of a box-ticking exercise.

People don’t like to plan for the future, so following the lead of other countries, such as Sweden, Australia and New Zealand, the UK set about implementing an automatic mechanism. Once in, it is thought employees will be far less likely to opt out – and there is another very good reason underpinning this logic.

Pensions have suffered a number of scandals compounded by press coverage that ignores the benefits of saving over time. However, workers may not trust the financial services institutions or the government, but they do trust their employer. This is because they have an established and ongoing financial relationship with the company. So an employer-badged scheme is likely to be trusted more than something bought on the high street.

Without encouragement, we have a tendency to either do nothing or leave it far too late

It remains to be seen how small and medium-sized businesses comply with the law, but those facing their staging date over the next year have used the process to reassess the way they offer benefits to their workforce. Many are considering one of a range of corporate platforms that combine an individual savings account (ISA), employer share plan and a pension.

Employers recognise their workforce is not only more diverse than in previous generations, but more mobile. Few expect a job for life and are likely to have many careers in their lifetime, rather than a handful of jobs in the same industry.

A corporate platform provides greater flexibility for employees by allowing them access to more tax-efficient saving across the short, medium and long-term, engaging them in the concept of saving rather than a game of take the money and run.

This gives workers greater control over saving for the future – control they will need to exercise as the defined contribution pensions environment our nation is shifting to places the responsibility on the shoulders of the individual, rather than the employer or the state.

Employers are going to great lengths to ensure that any default investment options will perform satisfactorily, but we all know one size does not fit all. If we are telling people they need to take responsibility for their futures, then that will have to extend to making their own choices, whether they take advice, receive guidance from their employer or some financial services or government agency, or use a pin to select their investments.

Engaging with these workers is going to be crucial. We must encourage them to take charge of their saving so they can at least be sure they are making decisions that suit their objectives.