REBA Inside Track: Pension Review delays cannot drag on
It all started in a blaze of glory. The Labour government announced phase 1 of its Pensions Review in August 2024, a mere month after coming into power. This was an impressive response to a manifesto promise that more cynical observers might have expected to take some time to see the light of day.
Roll forward four months and, following publication of the interim findings from phase 1 (focused on local authority pension governance, and investment strategy for DC schemes), Chancellor Rachel Reeves announced that she would be pausing phase 2.
Phase 2 relates to adequacy. Reeves’ reported reason for the delay is concerns that employers, about to be hit with higher National Insurance Contributions (NICs) and National Minimum Wage (NMW) bills as a result of the October 2024 Budget, would baulk at the idea of proposed higher pension contributions as well.
While on the surface this seems logical, in reality it is odd. Exploring adequacy now won’t equate to an instant hike in auto-enrolment contribution rates – there are consultations, interim reports, final recommendations and potential legislative changes to work through before any increase would happen.
Other angles on adequacy
There is more to retirement adequacy than increasing minimum contribution rates. Helping employees save more for their own retirement – with or without compulsion – is a vital part of adequacy, but there are others too.
The FCA’s Financial Lives 2024 survey found that 75% of over-45s don’t have a plan for how to take money from their pension, or don’t know that they have to make a choice. That figure is far too high.
Helping employees know their retirement needs and how to plan properly for them, understand how state and workplace pensions interlink, and have access to good quality, easy-to-use decumulation options are all important too.
Lack of pensions knowledge is a significant concern for employers. REBA’s Future of Pensions Research 2024, carried out in July and August last year, found that no, or limited, pensions guidance and education topped employers’ pensions challenges, with 55% citing this as a current issue.
Existing initiatives, such as pension dashboards and the FCA’s proposals for targeted solutions will help. Keeping up to date as these evolve will help employers support employees as they plan for retirement.
The good NICs news in the Budget
Continuing to exclude pension contributions from employer NICs was a positive Budget outcome.
Research from REBA and the Association of British Insurers, carried out immediately before the Budget, showed that three-quarters of employers already offer contributions above auto-enrolment minimums – but that 42% would reduce those contributions if the employer NICs exemption had been removed.
This makes benefits such as pensions salary sacrifice very compelling, helping both employees and employers reduce NICs and tax. It also, hopefully, means that employers already offering contributions above auto-enrolment minimums will be able to continue to do so.
Why employers?
There are plenty of good reasons for a short delay to phase 2. But I’m unconvinced that employer worries are a good justification. Although many businesses will be hard-hit by the NICs and NMW increases, that doesn’t mean the government can’t press ahead with exploring pensions adequacy.
There will never be a good time to introduce increases to minimum contribution rates. Now might be a particularly bad time, but it is within the government’s control, hopefully working with employers, to decide when increases take place, in what form, and how they dovetail with other financial change affecting businesses.
In the meantime, employers must use every tool and initiative at their disposal to help employees save for an adequate retirement, without legislation.
