Leaky Roof

Pensions to some people are like fixing the leaking roof whilst the sun is shining, in advance of waiting for the storm to come. But for nine million people in the UK, they will find that work has already started to fix that leaking roof when it comes to their pensions. To put it another way, since 2012 and the dawn of auto-enrolment, work-place pensions have ensured that there is a minimum amount that employees have to save for their retirement.

Auto-enrolment has now increased from 2% to 5%, where the employer contributes 2% of that 5% total. The natural consequence of this increase in auto-enrolment is that there will be less take-home pay for the employees each month. This is not as dire as it sounds given that the employees are building up their pension pot for their retirement, where in some cases none previously existed.

The real question is will auto-enrolment change the savings culture within the UK so it is similar to that of some of our continental cousins, such as the Germans. The change in savings culture was one of the intentions of auto-enrolment.

Within the UK, all of the businesses subject to auto-enrolment have already done the hard work by setting up the relevant schemes and ensuring they are compliant. There is no denying that businesses will feel the effect of the increase, but this is something they can plan for. The real hope is that their needs to be a sea change in the savings culture on the basis that people are more aware that they can no longer be reliant on the state pension income to see them through their retirement years.

But the acid test as to whether or not there has been a sea change will come next year when auto-enrolment will rise to 8% in April 2018. In respect of this 8%, there will still be an increase for employers from 2% to 3%, but the employees will be bearing the 5% contribution. So, if employees continue to embrace this new era of work-place pensions and decide to continue contributing and not opting out of work-place pensions, notwithstanding the squeeze on take-home pay, then I think we will have seen a cultural change to savings at long last in the UK.

Looking around workplace today, I can already see that people’s expectations on life expectancy has changed and that given the strength of the silver pound, pensioners will not want to compromise on their expectations for holidays, leisure, food and such like. Therefore, they need to make sure that their expectations can be sustained and workplace pensions goes some way to achieve this.