What has changed in workplace pensions?

Not only has the type of scheme changed, but also there are rules on how much you can now contribute to a scheme each year under tax legislation, and there are rules governing when you can take it out (age 55, thanks to pension freedoms).

It had once been understood that you got a job for life until age 60, when you retired. People were expected to live off the state pension, supplemented by a workplace pension that was considered a 'work perk'.

But then, back in 1988, the government made a big move that signalled the first in a line of changes to state pensions. In 1988, the UK passed legislation to allow people to opt out of Serps (the state earnings-related pension scheme) and take out personal pensions instead; but the pensions mis-selling scandals of the 1990s caused a serious setback for savers.

From May 1990, measures were put in place to ensure equality for men and women, who had been disadvantaged under old pension scheme contracts, under pensions equalisation as laid out in the famous Barber case.

Even the highest interest savings accounts on the high street cannot beat workplace saving. Kate Smith

Yet nearly 30 years on we are still working through the very high-profile ramifications of inadequate equalisation measures, implemented badly.

This means that even as late as 2016 the Department for Work and Pensions was forced to issue a consultation on a new methodology for equalising pensions for the effect of inequalities caused by GMPs in private pension schemes, while HM Treasury was carrying out a separate consultation on how best to treat GMPs for affected members of public service pension schemes.

But even with all this political willpower to improve the situation, until very recently, not all employers offered a pension. People working for micro or small organisations were often doubly disadvantaged, by being paid a minimum wage and working with no pension or other employee benefits.

Now, since 2012, all workplaces must offer access to a pension thanks to automatic enrolment and from this year, 2018, there should be no employer left behind when it comes to auto-enrolment.

To outline all the changes to workplace pensions would probably require a whole new website, so here's a quick overview of just four of the biggest changes to workplace pensions in the past 20 or so years.

DB to DC - and beyond

In the early 1990s, applying for a job also meant finding out whether or not the employer offered a defined benefit (DB) pension scheme, and making sure you joined it on day one. 

That was certainly the advice I got from my mother (who used to work in pensions), and was the advice I followed. 

But nowadays DB schemes still open to new members are rarer than hens' teeth and those who are already in DB schemes are often finding their employer will find a way to transform the workplace pension from a gold-plated final salary scheme to a double-edged defined contribution (DC) one, in which all the investment risk is passed from scheme sponsor to scheme member, and where the only way to ensure a comfortable retirement is to put as much in as you are allowed to under scheme rules.

Data from the Office for National Statistics in September 2017 revealed the state of occupational (workplace) savings in the UK, to the year end December 2016.

It found a significant shift over the past decade in terms of percentage of people in defined benefit (DB) compared with defined contribution (DC) schemes, as Figure 1 shows.

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"Over the coming years", says Sean McSweeney, corporate advice manager at Chase de Vere, "we will see the proportion of those retiring with any DB provision continuing to fall."

Auto-enrolment

In 2012, the government brought in auto-enrolment, making use of behavioural traits such as inertia to get more people into a workplace pension scheme and keep them in there.

The idea was to bring this into force in three phases, starting with the largest firms in terms of staff numbers, then the medium-sized employers and then all the small and micro-employers by 2018. It is now law for every single employer in the UK to offer access to a workplace pension.

Contributions initially started low - at 1 per cent for both employee and employer, to minimise the potential for people opting out of the workplace pension, and to get people used to the idea of saving into a pension through their workplace.

Neil Adams, head of pension planning at Drewberry Wealth, comments: "When it comes to workplace pensions, one of the most important changes has been the introduction of auto-enrolment, enrolling everyone eligible (and who hasn't opted out) into a workplace pension."

To date, according to the Department for Work and Pensions, approximately 9m people have now been brought into a workplace pension thanks to auto-enrolment.

Within the ONS's Occupational Pension Scheme survey last year, the agency found:

• Total membership of occupational pension schemes in the UK was 39.2m in 2016, the highest level recorded by the survey.
• This represented an increase of 17.1 per cent on 2015 (33.5m).
• Active membership of occupational pension schemes was 13.5m in 2016, split between the private (7.7m) and public sector (5.7m).
• Total number of preserved pension entitlements increased from 11.8m in 2015 to 15.4m in 2016.
• Active membership of private sector DC schemes was 6.4m in 2016, representing an increase of 62.5 per cent on 2015 levels (3.9m).
• In 2016, for private sector DC schemes, the average total (member plus employer) contribution rate was 4.2 per cent, broadly comparable with 2015.

Peter Glancy, head of policy development for Scottish Widows, also believes auto-enrolment is the biggest development in workplace pensions. 

He explains: "It's not just that millions of people are saving into a pension for the first time but for some people, it's the first real saving of any kind.

"It has also been a catalyst for innovation and change in the industry. For example, the increase in small pots has seen us develop a simple online transfer process."

The importance of bringing more people into a form of savings habit, with the aim of ensuring they are not 100 per cent reliant on an ever-diminishing welfare state in retirement, cannot and should not be under-estimated.

Kate Smith, head of pensions at Aegon, says: "It's important the value of long-term saving and free money that workers get in return for their contribution is not overlooked.

"Even the highest interest savings accounts on the high street cannot beat workplace saving."

Contributions and taxation 

It should also be noted that, under auto-enrolment, contribution levels are set to rise this year, as contributions are hiked from a total of 2 per cent (employer and employee) to 5 per cent in April. 

This means for an average UK salary of £28,000, workers will pay £45 every month into a pension but with the employer uplift, this will mean £94 in total a month will be saved.

Next year, 2019, will see a rise to 8 per cent contribution rates. Some sceptics fear this could lead to an increase in the amount of people opting out (currently just less than one in 10).

Ms Smith adds: "Extra employer contributions into a workplace pension is like a pay rise, and it is unlikely anyone would turn that down.

"We hope people recognise the need to make personal savings for retirement and see that a workplace pension is the best way to put their money to work and save for retirement."

Admittedly the majority of people on auto-enrolment pensions are unlikely to be the sort of high earners being targeted by the government's annual limits on pension contributions, so an uplift of this level will not affect their tax position.

However, it could positively affect their total retirement income. Research carried out earlier this year by Aviva found even a boost from 2 per cent to 5 per cent this year could see an annual boost of 30 per cent growth in their pension pots. 

This could mean the average employee who began saving into a workplace pension when auto-enrolment started could end up with £36,000 more in their pension pot on retirement as a result, the Aviva research suggested. The table, below, highlights how this could work.

Table 1: Increase in AE pension contributions boosts UK pension pots

But Andy Curran, managing director of corporate at Aviva, says even 8 per cent will not go far enough, adding: "It is vital the latest milestone is used as a basis on which to build further momentum around the need for people to save for retirement.

"If as a society we are to avoid a retirement savings crunch further down the line, we must go further still in the years to come.”

Pension freedoms

In April 2015, the pension freedom and choice regime came into force, meaning people now have the right to take their pension pot how they like it at age 55.

"The introduction of pension freedoms presents a fundamental challenge to workplace pension schemes," says Tom Selby, senior analyst at AJ Bell.

"This is particularly so in relation to setting an appropriate investment strategy," he adds.

Research from Prudential has found that, three years since the introduction of pension freedoms, more people are saving more than ever before with a view to a better financial outcome in retirement.

Research from the life and pension provider found 11 per cent of people who are over 55 and working say they have started saving into a pension for the first time, they have encouraged their partner to save more, increased their pension contributions or restarted pension saving since the rules came into effect.

Additional findings include:

• Nearly two out of three (64 per cent) of over-55s say they are confused by the regulations.
• The overwhelming majority (82 per cent) want an end to any further government changes to pension rules.
• Over two fifths (42 per cent) are concerned about running out of money during retirement while 41 per cent worry about paying for long-term care.

Mr McSweeney believes pension freedoms are the "biggest change" to workplace pensions in a generation. He explains: "Pension freedoms mean extra risks, and we will, over time, see many winners and many losers.

"While the freedoms provide flexibility and opportunities through more choices, they also provide greater complexity." 

For Mr McSweeney, this means more people will make the wrong decisions - particularly if they are unadvised or do not take up the free guidance services that are on offer - and this will affect their standard of living in retirement.

simoney.kyriakou@ft.com