Why is the 10 year anniversary of Auto Enrolment and RDR* relevant to the cost of living crisis facing your staff – and what should business owners and managers be doing to help?

This article looks at the fundamental changes that have taken place over the last decade in the pensions landscape and what effect they have had on the employer and the workforce and offers some pointers to demonstrate what you can do today – given that wholescale large salary rises are not always feasible – to minimise the fallout from the cost of living crisis facing everyone. 

Written by Rachel Meadows, Head of Proposition Pensions and Savings at Broadstone

Most of the talk around the 10 year anniversary of Auto Enrolment legislation centres, quite rightly, around heralding the success of driving pension saving participation rates upwards but balancing that triumph against a persistent challenge of under-saving. Far less mainstream attention though has been paid to another decade milestone; one which arguably impacts employers and their staff just as much. Ten years have now passed since the Retail Distribution Review (RDR), a set of changes that increased minimum qualification standards for the delivery of financial advice and also scrapped the ability to be able to take commission payments from pension products.

Why did this have a big impact on employers? Prior to RDR, many employers providing pension savings to their staff did so supported by specialist advisers, often paid for by commissions, who not only provided employer advice but also helped staff to engage with their savings and understand the often unfathomable world of pensions with all its technical language and alienating acronyms. Post RDR, this support and guidance needed to be paid for by employers through direct fees. Inevitably, this led to challenges for employers, balancing the support and advice that they and their staff needed against the costs of providing that. In many cases, employers and their advisers did a lot of the groundwork for Auto Enrolment, including scheme selection, in the run-up to RDR.

This decade double anniversary therefore means that for a lot of businesses, their workplace pension schemes may not have been reviewed in detail for over ten years – ten years which have seen a gargantuan amount of change for pensions and for businesses. In the current climate of abundant cost of living challenges, some of those changes provide employers with some opportunities to help their workforce mitigate the impacts, especially given that wholescale large salary rises aren’t always feasible.

The first big change is that the last ten years have seen average annual management charges on workplace pension schemes decrease quite significantly. This is down to a number of factors but, notably, RDR and Auto Enrolment played a big part. Reviewing the workplace pension product you are offering to staff could result in significant cost reductions for staff in terms of charge levels. Whilst this might not help improve their spending power now, it will in the future. (All things being equal, the less charges taken out of your workers’ pots, the more left is in their savings pot for their retirement).

Pensions Freedoms and Choice

The second big change was Pension Freedoms – the introduction of much more choice in terms of retirement options for savers. Whilst it is true that not all pensions set up more than a decade ago will automatically provide access to the full range of options, the bigger impact of the freedoms is actually a big change in ‘typical’ default investment strategies. Prior to the freedoms, most default funds gradually de-risked as savers approached retirement, with the ultimate goal of being invested around 75% in gilts and bonds and 25% in cash – ideally placed to risk-match against the purchase of an annuity. Given that drawdown has become far more popular than annuity purchase, in recent years de-risking strategies have evolved to take account of this. If you haven’t reviewed the default fund in place for your workforce, it is entirely possible that they are reducing in risk too fast, too soon, and are losing out on valuable years of potential investment growth before they retire. This mismatch can mean lower savings pots to last through retirement – which isn’t a well-understood threat to the cost of living of your staff in later life.

Progress has also been made on the front of flexibility more generally, with many employers who have reviewed and overhauled their workplace pension provision in recent years providing access to workplace ISA savings alongside the longer term tax efficient pension pot. Even NEST has trialled a sidecar savings scheme. Providing access to shorter term savings pots, and encouraging your staff to engage with these, can not only help build financial wellbeing and resilience generally, but can provide an invaluable financial cushion for straitened times.

Tax limits and allowances have also been cut (both obviously and by fiscal stealth in freezing thresholds) for a number of years and pensions are no exception to this. Higher earners face stringent limits around what they can save tax-efficiently into a pension as well as your mid life workers who may have accessed pension savings during the pandemic to tide them through but, in so doing, may have triggered a strict limit around their future pension saving – the Money Purchase Annual Allowance. Ensuring that your staff have access to the information and guidance they need to navigate the plethora of tax rules is not only good practice but can also be an effective defence against an unexpected and unwelcome tax bill landing on their doormat (and their subsequent knock on payroll and HR doors).

For employers who may have been largely unaware of the 10 year anniversary of RDR and AE, this birthday marks an opportune time to make sure that their workplace pension provision is abreast of the changes that have taken place. Whilst some of the opportunities to aid your employees’ costs of living challenges are helpful in themselves, the biggest opportunity is perhaps the ability to demonstrate to your staff that you are actively trying to help and trying to provide the best quality benefit through the pension that you can. When retention and recruitment are just as challenging as cost of living, engendering positive engagement with your staff can carry a big dividend.

(*The Retail Distribution Review or how the financial services sector should be professionalised and its advisers renumerated)