- Employers will need to prepare for the rise in employer national insurance contributions (NICs) to 15% from April 2025.
- Organisations may want to make higher pension contributions than the statutory minimum to ensure adequate retirement incomes for staff.
- A tax-efficient way for employers and employees to pay less NICs and increase staff pension savings is to implement a salary sacrifice arrangement.
In terms of priority within their benefits package, employees rank their pension as second to their salary, according to Royal London’s October 2024 Workplace pensions: are they working hard enough? research. This is solid evidence that it is of high importance to employees, and that employers should be exploring what they can do to support workplace pensions.
Upcoming pension issues
When looking ahead to 2025, pension contribution levels will be sharply in focus. Employers will, no doubt, be assessing how to respond to the rise in employer national insurance contributions (NIC) to 15% in April 2025, as announced by Chancellor Rachel Reeves in the Autumn Budget in October.
Tim Middleton, director of policy and external affairs at Pensions Management Institute (PMI), says: “The employer NIC rate, which was last at 15% in the 2010/11 tax year, may cause significant financial pressures for some employers. Many will seek to pass increased costs on to their employees. This may take the form of pay freezes, or contribution structures to defined contribution (DC) pension schemes may be changed.”
It remains to be seen whether contribution levels will be a casualty of higher costs. It is also unclear what the full outcome will be of the government’s Pensions Review, which was launched in September 2024, adds Middleton.
“There will be pressure on smaller DC schemes to consolidate, so employers sponsoring smaller trust-based DC arrangements may need to make changes to their workplace pension provision,” he says. ”The composition of DC default funds may also be subject to change to accommodate higher levels of investment in UK organisations.”
Additionally, the Pensions (Extension of Automatic-Enrolment) Act 2023, which was passed in September 2023, will abolish the lower earnings limit threshold and reduce the eligibility age for employees to be automatically enrolled into a qualifying workplace pension scheme.
Philip Smith, director of DC at TPT Retirement Solutions, says: “We are fully supportive of the reforms to widen the net of those included in auto-enrolment, but this may now take longer given many employers may not be able to afford the increased costs.”
Focus for employers
It is crucial that employers continue to support employees with their retirement savings and play a role in encouraging them to make good long-term choices. They can focus on this by ensuring their scheme is a compelling and well-understood part of their benefits offering.
Rory Marsh, customer lifestage director at Royal London, says: “The fundamental challenge remains that too many individuals are not on track to achieve the retirement living standard they deserve. Employers need to get employees’ attention regarding their pension savings, they should make it as easy as possible to make informed decisions. There are a range of tools to work out how much to save and matched contribution structures are highly valued.”
Employers should ensure that a focus in the coming year is to prioritise adequate employee retirement incomes by reviewing their current schemes and whether they can make any improvements.
If they are not doing so already, employers should be starting to think about whether their pensions offer employees overall value for money, says Zoe Alexander, director of policy and advocacy at Pensions and Lifetime Savings Association (PLSA). “This can offer assurance for employers that the money they’re committing to pensions is delivering the best retirement outcomes,” she says. “Additionally, we would encourage employers to go further than the minimum auto-enrolment contributions, which are 8% of an employee’s qualifying earnings, with a minimum employer contribution of 3%.”
For organisations to be eligible for the PSLA’s Pension Quality Mark accreditation, they will need to offer a 12% contribution that includes at least 6% from the employer, while the enhanced option accredits employers that offer 15%, with at least 10% from the employer. Alexander recommends employers look into this to offer employees extra support.
As employers grapple with a spate of challenges, pensions may not be at the top of their minds. However, it is a significant part of the remuneration package, so they should ensure they are helping employees to have the best possible chance of building a workplace pension.
“Employers should not compromise the progress that has been made in improving workplace pension provision since 2012, as far more employees are now members of occupational pension schemes,” says Middleton. “Although some employers may be looking to reduce the cost of pension provision, they should be preparing to make higher contributions than the statutory minimum.”
Different approaches
Employers can support their employees’ broader financial resilience through their benefits package without increasing any costs. One size does not fit all regarding boosting pension awareness and encouraging employees to make good decisions, so employers may want to experiment.
“Employers could mix up the channels and resources they use. We’re seeing increased engagement with bite-sized video content, for example, and greater usage of online pension contribution guidance tools,” says Marsh. ”Also, employers can think about how they might segment employee groups to reflect their different financial needs and pressures.”
As the Autumn Budget did not introduce NICs on pensions, as had been feared beforehand, this could offer employers an opportunity to provide salary sacrifice arrangements on contributions because this can be a tax-efficient way to boost pension savings while reducing NICs for both employers and employees. This could be beneficial regarding the employer NICs rise, while also providing an attractive pension scheme.
“However, it is important that employers help employees understand what salary sacrifice is and what its implications are,” says Smith. “It is also crucial that employers help employees navigate any administrative challenges stemming from the schemes, such as keeping a record of pre-salary sacrifice remuneration for benefit and mortgage referencing purposes.”
Employers need to ensure that while there are multiple aspects of workplace pensions for them to focus on in the coming year, their employees are at the heart of any decisions they make.
