Need to know:
Automatic-enrolment into workplace pension schemes was introduced to encourage people to save more for their retirement.
Employers may run more than one pension scheme or vary their contribution rates for different cohorts within their workforces.
An employer might run two schemes alongside each other when it has acquired another organisation with its own pension scheme, or if it is still running a defined benefit (DB) pension scheme
As defined benefit (DB) pension schemes declined in the UK, the government grew concerned that future generations were sleepwalking into retirement poverty. In response, it introduced automatic-enrolment, often called auto-enrolment, which compels organisations to put their employees in a pension scheme. This employer duty applies from the moment they employ their first member of staff.
What is auto-enrolment?
Auto-enrolment was introduced in the Pensions Act 2008; employers must enrol anyone who is classified as a ‘worker’, aged between 22 and state pension age, ordinarily working in the UK and earning at least £10,000 per year, in an appropriate pension scheme.
Employers must contribute a minimum of 3% of an employee’s salary, while employees must contribute 5% (comprising a 4% contribution and 1% in government tax relief). However, the minimum rates will not give most people a comfortable retirement, so some employers are choosing to put more in.
Employees must be enrolled into an appropriate, UK-registered pension scheme. Choosing the right provider is critical; the major master trusts in the UK have delivered very different investment returns for members. As Martin Willis, partner and defined contribution (DC) pensions consultant at Barnett Waddingham, explains: “Schemes are far from equal, with our research showing some default investment solutions returning 13% more than others in the year to 21 December 2024. Charges are always going to get attention as they are knowable in a way future returns are not, but value should be the focus, not cost.”
Investment was a key focus for the Wolseley Group, a provider of plumbing, heating, cooling and other utility products, when it chose a master trust. Ant Donaldson, reward manager at Wolseley, explains: “The reason why we thought it’d be better going to the master trust was that, as a standalone trust, even with external investment consultants, there are only so many tweaks and so much complexity you can build in. Whereas a master trust has a huge investment research team. And so that became a very large part of our tender process.”
The scheme picked the master trust it believed would offer the best outcomes to members, rather than the cheapest price, adds Donaldson.
Employers choosing a provider should scrutinize its investment performance, costs and charges, retirement strategies and approach to communicating with members, among other things.
Auto-enrolment alongside other pension schemes
It is most common for an employer to just have one pension scheme for all employees, which pays a consistent percentage of contributions across the board.
That said, there are reasons why employers might run more than one pension scheme or vary their contribution rates. An employer might run two schemes alongside each other when it has acquired another organisation with its own pension scheme, and the two schemes are not easy to merge. Another scenario is when an employer may be still running a DB pension scheme. Most UK DB schemes are closed to new members, but some organisations are still running a legacy scheme alongside their current DC arrangement.
An employer may have some very different cohorts of employees within its workforce. For example, a financial services organisation may have senior, well-paid corporate staff as well as call centre employees. This type of employer may decide to have two pension schemes for the different populations of employees. However, this is less common than it used to be, because of employers’ focus on making benefits more equitable.
Differing contribution structures
Most employers will pay consistent contribution rates across the workforce. Paying the same percentage of contribution rates across its workforce will naturally create tiering; highly-paid employees will receive more money.
That said, some employers might want to offer enhanced contributions to employees to recognise their loyalty after a certain period of service. Employers in that position should state their position clearly to avoid alienating newer employees; and ensure that their basic scheme also offers decent provision.
As Helen Morrissey, head of retirement analysis at Hargreaves Lansdown (HL), says: “[Employers] which are looking to run different schemes and pay different contribution rates are vanishingly rare. There’s a big push for equity in the workplace. They don’t want to be seen to be overly benefiting higher earners, for instance, at the expense of lower earners.”
Instead, employers are increasingly aware that auto-enrolment minimums will not give many people a comfortable retirement, adds Morrissey.
Encourage staff to save more
In terms of broadening private pensions coverage, auto-enrolment has been a great success. More than 22 million people were saving into a workplace pension in 2023, over 10 million more than in 2012, according to the Department for Work and Pensions’ Workplace pension participation and savings trends, 2009-2023, published in July 2024. However, there are concerns that auto-enrolment contribution rates are too low.
“Auto-enrolment is one of those rare policies that both industry and political parties across the board seem to universally love,” says Barnett Waddingham’s Willis. ”Often heralded as the saviour of UK retirement saving, the increase in numbers saving is impossible to discount.
“That said, it’s also acknowledged as a job half done. The amount people are saving is still not adequate let alone desirable in many cases, and there are still big gaps when it comes to gender, ethnicity and affluence.”
While it may be impossible for many in the current climate, some employers are making higher contribution rates a priority. Morrissey reports an increased focus on adequacy among Hargreaves Lansdown’s corporate clients, perhaps driven by initiatives like Pensions UK’s Retirement Living Standards and its own Savings and Resilience Barometer.
Talent attraction and retention plays a part as well. “Depending on what industry an employer is in, it may need to keep up with the competition as well,” adds Morrissey.
Employers can also encourage their people to save more than the minimum. “On an individual basis, some people will be able to contribute more,” says Willis. ”Save more tomorrow, or auto-escalation, initiatives are less prevalent here than in other countries, but having employees sign up to yearly incremental increases can get them to good outcomes before they know it with minimal intrusion.”
Ensuring employees save enough for a comfortable retirement remains a shared responsibility. Employers that take a proactive, informed approach to their pension strategy can not only support their people’s long-term financial wellbeing but also strengthen their own position as an employer of choice.
