When recommending a workplace pension there are many factors to consider.
However, there are arguably three key areas that should be included in every assessment of ‘value for money’ as these will affect the suitability of your advice, namely:
- Contributions (saving enough)
- Costs (costs reduce returns)
- Effective management of the default fund (including performance)
In this article we take a deep dive into these three subjects with the objective of helping you understand how to evidence and illustrate your guidance and advice.
Auto-enrolment introduced minimum contributions that must be made. To ease the financial burden these were phased in and historically the rates were:
With over 10m employees now saving for their retirement, we can assume that this strategy has by and large worked.
But, not all employees have to be treated the same by their employer.
The following ‘optional’ exclusions are allowed, as indicated by The Pensions Regulator (TPR) website guidance on setting up a solution:
An illustration of the salary parameters:
The salary exclusion parameters are something advisers need to be careful with.
It is easy to state that the contribution rate is 8 per cent and for the employer to then pass this information onto their employees in relation to all of their salary.
However, as illustrated below, when the upper and lower parameters are used the reality is not 8 per cent:
Actual contribution rates when lower and higher salary exclusion parameters are used
When we consider the impact of the ‘salary exclusion parameters’ it is clear that all employees are disadvantaged.
However, those on the extremes of low and high pay are disproportionately disadvantaged the most.
This brings us to the Equality Act 2010.
It defines ‘indirect discrimination’ as "putting rules or arrangements in place that apply to everyone, but that put someone with a protected characteristic at an unfair disadvantage".
Arguably employers operating any of the exclusions have introduced ‘indirect discrimination’ into their workplace.
That said, the Equality Act states it is lawful to have specific rules or arrangements in place, as long as they can be justified.
Therefore, if you recommend the exclusions you need to be able to quantify the impact(s) they create and justify the different outcomes.
From an advice perspective we suggest advisers tread carefully so as not to an inadvertently recommend their employer clients introduce ‘indirect discrimination’ into the workplace.
We also suggest advisers consider the impact of any exclusion on particular groups of employees, for example, employees moving from full-time to part-time contracts.
These are often mothers returning to work and as the table below shows reducing the contracted days has the following impact:
As illustrated, reducing paid days not only reduces the salary but also the pension contributions as a percentage of the reduced salary.
In other words, a pay cut via pension contributions simply for working less hours.
Tax relief is not always provided