Employer pension contributions for defined contribution plans have fallen from 7 per cent of salary in 2022 to 6.5 per cent in 2023, while employee contributions have decreased from 5.2 per cent to 5 per cent over the same period, according to Gallagher.
Its most recent 2023 Benefits Strategy & Benchmarking survey shows a decline, which is largely driven by the cost-of-living crisis. The decline is not as significant as some might have anticipated, with opt-out being low and more companies spending on other benefits due to the recruitment issue.
The data shows that the usual (median) minimum contribution made by employees has fallen to 3 per cent of salary, down from 4 per cent in 2022. The research also reveals that 88.5 per cent of employers now offer retirement savings above the statutory minimum, marking a 16 per cent increase from 2022.
Gallagher benefits consulting director Jason Cannon says: “What it is highlighting, through the evidence that contributions are slightly coming down, is the pressure on employers and indeed employees with the cost of living crisis. I also think there’s some evidence that other benefits are also important. Sometimes focus and spending from an employer level may be redirected in other areas and actually that could be a very positive thing when you think about the broader financial wellbeing piece.
“It’s a tough time out there so people could potentially slightly reduce it down. It’s surprising it hasn’t gone down further or in fact, opt-outs haven’t been that much higher.
Cannon highlights that many people enrolled in pension schemes may not fully understand their options, including the ability to opt out. There’s a general lack of awareness that pension contributions are invested in real assets, impacting engagement and education efforts. He says that while auto-enrolment legislation aimed to increase pension participation, many remain unaware of their choices regarding investments and beneficiaries.
Cannon says the lower-than-expected opt-out rates highlight ongoing challenges in educating individuals about their pension decisions and long-term implications.
Cannon also highlights the competitive landscape for talent, noting that many employers, particularly those participating in the survey, are enhancing their benefits offerings to attract and retain staff, often exceeding statutory minimums.
The use of benchmarking and analytics guides these decisions, tailored to sector-specific demands, with some adopting higher auto-enrolment contribution levels and flexible matching structures to accommodate diverse employee needs and preferences.
He says: “I think the battle for talent has never been higher. Employers want to be seen to be above the statutory minimum and in fact offer something that surpasses that because many of our clients are in a very competitive environment.
“Some have started to bring in different levels of matching… I am increasingly seeing people auto-enrol at high levels and then giving them the option to stay, go lower, go higher, whatever it might be. So there’s some different tweaks of designs that you’re seeing from very engaged employers and I think that’s quite powerful.”
Cannon mentions the substantial pension advice gap in the UK, noting barriers to receiving reasonable and reliable advice allowing individuals to make informed decisions.
He says: “Pension freedoms gave people lots of options, which is a really good thing, however, it’s put so much onus on individuals to try to make a reasoned choice about what those options are. I think it’s really difficult.
Cannon emphasises the need for good employer governance and ongoing improvement in support and education initiatives. He stresses the need of collaboration in closing the advice gap and improving individual outcomes.
“I’d say in general, things have been fairly stable despite the challenges that are out there for both employees and employers.”
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