Employees opting out of workplace pensions ‘could be nudged back in sooner’
Employers who opt out of their workplace pension during the coronavirus pandemic could be encouraged back into retirement saving more quickly than usual, MPs have suggested.
The Work and Pensions Committee recommended that the Pensions Regulator should consider whether employees should be helped to re-enrol earlier than would happen normally under automatic enrolment.
Every three years, employers are required to re-enrol employees who have left a pension scheme back onto it.
Workers may opt out because of their immediate financial difficulties caused by the coronavirus pandemic.
But the committee heard evidence that contributions paid during the pandemic could end up being particularly valuable for savers.
Its report said: “Contributions made when market values are low will see a greater increase in their value than usual if markets return to normal levels.”
It continued: “Employees cannot legally be encouraged by their employer to opt out of their pension contributions, but many people may opt out voluntarily if their incomes fall because of the pandemic.
“We recommend that the Pensions Regulator consider whether employees who do opt out during the pandemic should be helped to re-enrol earlier than would happen normally under auto-enrolment.”
Commenting on the report, Tom Selby, a senior analyst at AJ Bell, said: “The Covid-19 pandemic has placed huge strain on household incomes and it is inevitable some people struggling to make ends meet will have felt it necessary to opt out of their workplace pension. It is crucial these people are nudged back into saving for retirement as soon as possible.
“Under current rules anyone who opts out will be re-enrolled automatically three years later.
“However, three years of missed contributions is not immaterial – someone earning £30,000 who had been auto-enrolled at the minimum level and chose to opt out would have £5,702 less going towards their retirement, including £2,138 in employer contributions and £713 in tax relief.”
The committee also said the Pensions Regulator should be alert to the risk of unscrupulous actions by employers during the pandemic.
Falls in the value of pension funds have pushed up deficits in defined benefit (DB) or final salary schemes.
The report said: “If an employer is making deficit reduction contributions at a lower rate because of the pandemic, no reasonable person would expect them simultaneously to be paying dividends to shareholders and bonuses to senior executives.
“We recognise that there may be a small number of exceptions to this, but we would expect them to be wholly exceptional. We urge the Pensions Regulator to keep a close eye on this area, and to raise the alarm if it detects abuse.”
The Covid-19 pandemic has also created new opportunities for pension scammers – and the committee urged regulators to work together to monitor the effectiveness and reach of their communications.
Mr Bell continued: “Individuals face a clear and present danger from pension scammers, particularly given the uncertainty and volatility created by Covid-19. These scams can range from early access ‘offers’ to exotic investment offers promising double-digit returns.
“Whatever the method, the result for victims is all too often the loss of most or all of their hard-earned retirement savings. It remains critical as lockdown is eased that savers are switched on to the dangers posed by fraudsters.”
The committee also said rates of older benefits should be raised to help those who have not yet moved to Universal Credit and who are struggling to meet extra costs.
The committee heard evidence that coronavirus has increased living costs for disabled people. In a survey of more than 220 disabled people in April, the Disability Benefits Consortium reported that 95% had experienced an increase in costs for food, utilities and managing their health.
Stephen Timms, chair of the Work and Pensions Committee, said: “The coronavirus pandemic has highlighted weaknesses in a social security system which at times is too inflexible and slow to adapt to support people in times of crisis.”