Against a backdrop of high inflation driven by spiralling energy, food and petrol prices, worker shortages, train strikes, increased working from home, and ‘the great resignation’, how we work – and how we reward people for their work – has not been so keenly in the spotlight since the 1980s.
While adjustments to the living wage, Universal Credit, pay and working conditions – and even moving to a four-day week – have all been part of the solution debate, one area that is being sorely overlooked is employer pension contributions.
When a new employee joins an organisation, one of the things they should check is how much they, and their employer, will be contributing to their workplace pension.
Simple steps, which anyone can do in a few minutes and don’t require much understanding of pensions terms or language, can very quickly give you an idea of how well the scheme is going to help you achieve a suitable income in retirement. It can also help identify readily available extra benefits, such as your employer matching any extra contributions – in effect ‘free’ money.
This is important because, although automatic enrolment has been a resounding success for helping more than 10 million new people save towards their pension, contributions at the minimum rate of 8% of band earnings are unlikely to provide most with the level of income they expect in retirement. This is one of reasons the Pensions and Lifetime Savings Association (PLSA) has campaigned for many years for minimum pension contributions to be increased to 12%, with half of the contribution coming from the employer.
It is also why, in 2019, the PLSA launched its Retirement Living Standards, currently reaching up to 35 million savers, to help people picture their future retirement at three different annual income levels – minimum (£10,900), moderate (£20,800) and comfortable (£33,600).
The minimum standard covers all basic needs with only a little left over for fun. There is provision for one week – plus a weekend – holiday in the UK, for example, but at this level people are not likely to be able to afford a car. The moderate standard, on the other hand, offers more financial security and flexibility, and could provide for a two-week holiday and a long weekend in Europe annually, and a three-year old car, replaced every 10 years.
While the vast majority of people will achieve a minimum level of retirement income – mainly via the State Pension – to achieve a better standard of living in retirement requires a good workplace pension.
That, in part, is where the industry-standard Pension Quality Mark (PQM) comes to the fore.
PQM is an accreditation for workplace defined contribution (DC) pension schemes that was developed back in 2009 by the PLSA.
The PQM standards recognise employers – such as BMW, Heineken, Manchester United, Nationwide and UK Power Networks – that are committed to supporting employees to save for retirement by providing pension contributions above the minimum required by regulation for automatic enrolment.
To meet the PQM Standards, an employer must commit to offer all employees a contribution of 12% (with at least 6% from the employer). In addition, schemes must be well-run, understand their members and act in the best interests of those members. This includes choosing a suitable default investment strategy, appropriate communications, delivering value for money and listening to member feedback. Employers offering 15% contributions can also qualify for a PQM Plus accreditation.
The contribution threshold also reflects research from the PLSA’s 2018 Hitting the Target report, which found that a 12% contribution is necessary to reach a better standard of living in retirement.
It is also above the 11.2% annual contributions identified by the Resolution Foundation as the amount someone in their 20s – on average earnings of £25,000 per-year – needs to save into their workplace scheme.
Around 125 pension schemes currently hold either PQM or PQM Plus, with more than 650,000 employees actively saving in these schemes. Pension schemes which hold PQM are from a wide range of sectors, including financial services, charities, retail, pharmaceuticals and engineering.
The best and most responsible employers recognise that financially secure employees are happy employees. The Pension Quality Mark highlights those schemes that are really pushing to boost contributions and help savers achieve a better level of income in retirement and encourages others to join them.
Holders of the PQM tell us it is a great way to demonstrate excellence to prospective employees and new joiners and that the quality of the workplace scheme stands up to external benchmarking.
For organisations, in a world of full employment and increased demands for better pay and conditions, offering a world class pension might be the difference between attracting the best talent to your organisation and not.
For savers, there has never been a better time to check what level of contributions they offer, and whether they will match any additional contributions. If you are not getting the best deal, challenge them to explore the PQM accreditation.
To find out more about how you can apply for the accreditation and see a full list of PQM holders, visit the PQM website.