It will be interesting to see what impact the rise in contribution rates will have in 2017. We may have reached a tipping point in DC vs DB scheme membership; but it will be some time before we see an equivalent asset shift to DC.
Commenting on the ONS pension figures released today, Chris Noon, Partner at Hymans Robertson, the independent pensions, benefits and risk consultancy said:“It’s great to see scheme pension scheme membership on the rise – this is largely due to auto-enrolment. These figures show that, thus far, auto-enrolment seems to be working and is taking us in the right direction, which is good news. With over 90 percent of employees choosing not to opt-out more people are saving for retirement.
It will be interesting to see what happens when minimum auto-enrolment contributions increase from 2017. Our expectation is that many will continue to save into their pension. However, even when contribution levels increase to 8 percent, auto-enrolment will not be enough to provide an adequate level of retirement income. This has been exacerbated by the significant reductions in State Pension being introduced by the Government from April 2016.” On the 20-29 year old group seeing the biggest rise in membership, he added: “We’ve analysed the behaviours of over 360,000 employees in defined contribution (DC) pension schemes of blue-chip employers. Across the 20 to 29 year old age category, our dataset shows that 31 percent of this population is not saving enough to meet the minimum retirement income thresholds. On average, savings rates for individuals in their 20s and 30s should be around 15 percent of total pay which is twice the auto-enrolment minimum levels.
“For 20-29 year olds, the average total contribution is five percent.
Hopefully the new pension freedoms from April will help change the perception of pensions as poor value, and encourage younger generations to view their pension pots as another means of saving – and one that offers both great tax advantages and returns, particularly if your employer matches your contributions. Essentially that’s extra pay that you won’t get if you don’t invest in a pension. Our research has shown that 20-29 year olds will be in much better shape than those age 30-39 when they reach retirement. This is because they are younger, they will benefit from auto-enrolment for longer. Worryingly, 52 percent of 30-39 year olds are off track and they have less time to get back on track. This underlines the importance of saving into pensions from an early age.”
Commenting on the fact defined benefit (DB) pensions schemes represented less than half (49 percent) of total workplace pension membership in 2014, for the first time since the series began in 1997, he said:“It’s interesting that we’ve reached a tipping point for the shift from DB to DC, with more people being members of DC schemes than DB plan. It’s worth noting, however, that the process of automatically enrolling people into pensions isn’t complete. There are still many SMEs who haven’t been through this yet so we could see this figure increase further over the next couple of years. However, the tipping point for a shift in assets is still some way off. With UK private sector defined benefit liabilities equivalent to one year’s UK GDP, with assets well in excess of £1tn, even with the advent of the pension freedoms, which could see a steady flow of DB benefits in to the DC world, it will be many, many years until DB savings are overtaken by DC. It would take a significant event, such as a huge boost to DC savings through automatic escalation of contributions, to change that. For DB schemes there is still a long route to settlement that needs to be mapped. Schemes need to hold a steady course, navigating near term risks and opportunities, such as the pension flexibilities and the anticipated revolution in the risk transfer markets this year.”
From July 2013 aggrieved employees were required to pay a fee to first litigate a claim and then if the matter is to go to hearing a further fee – both of which are significant at up to £1200 in total. In the subsequent period tribunal claims have dropped by a worrying amount with some sources quoting a fall of as much as 90 percent, to the extent that groups who support workers (i.e. Citizens Advice and unions) are claiming the fees are prohibiting access to justice. Business Secretary Vince Cable is now undertaking a review to determine whether fees have prevented employees pursuing their reasonable and well-merited claims. There are other important factors affecting the level of claims.
Just prior to the introduction of fees the qualifying period for an employee to bring a claim for unfair dismissal increased from one year to two. Employers therefore have now had more time to decide whether a new staff member is suitable, all of which has occurred over the same period the fees have started to bite. It is reasonably common for employers to not make up their mind about a new employee until after 12 months. This will have inevitably meant those staff dismissed between one and two years’ service who could previously claim are now barred from doing so.
The compulsory pre-action ACAS conciliation came into force from May 2014, requiring an employee to register their claim with ACAS for one month prior to issuing it. If they do not go through the process then they are prevented from lodging the claim with the Tribunal. Many employers who, under the old regime, would not have offered money to settle claims initially are now encouraged to consider this before the claim is even issued. The economy is also improving with unemployment figures at record low levels. The boom time for Tribunals came in the period of economic downturn when redundancy levels were higher and dismissed employees found it a longer process to get work, thereby making the option of a tribunal more attractive. A significant portion of a tribunal award for unfair dismissal is made up of future lost income and so those who easily find new employment in a buoyant market are less likely to pursue claims worth less in compensation.
It is going to be very hard for Vince Cable to navigate all of the statistics and factors relevant to the decline in claims. There are also treasury issues as budgets would have been set against a certain level of fees to sustain the cost of the tribunal service and so the unexpected reduction will leave gaps in budgetary spending. At the time of introducing fees the concept was sold to the public as discouraging the perceived evil vexatious litigant from depleting the resources of the credible employer. Yet perhaps not enough attention was paid to the countless groups of mistreated employees who sought justice through Tribunals and who now appear to have been discouraged from pursuing legitimate and credible claims. There are clearly still groups of the workforce who need protecting and most will know a family member or a friend discriminated against, or have even experienced first-hand discrimination on maternity, race or age grounds. It seems only by personalising the impact of unfair treatment in the workplace that balance can be re-established as it is clear mistreatment has certainly not disappeared overnight.
[1] Consultation Paper on Whistleblowing in deposit-takers, PRA-designated investment firms and insurers.
