Three million workers missing out on £2 billion of 'buy-one, get-one free cash' from their employers
17 June 2017
New analysis by mutual insurer Royal London has found that over three million people working for larger employers are failing to take up around £2 billion a year which their employers have offered to contribute to their workplace pension schemes.
In many workplaces, workers pay a standard percentage of their wage into a pension and their employer pays in as well. But amongst larger employers in particular, valuable additional ‘matching’ contributions are available if an employee chooses to save beyond the minimum level. Where workers are unaware of this option, or choose not to take it up, they are in effect passing up on ‘buy-one, get-one free’ cash. Household name employers who offer to match additional pension contributions from their employees include Vodafone, Next, Bae Systems, Tesco and Royal Mail.
Royal London has undertaken analysis of the impact of missing out on ‘matching’ contributions based on the following information:
- The number of people who work in larger firms;
- Typical levels of employer ‘matching’ contributions available;
- Estimated levels of take-up of ‘matching’ contributions;
Based on this data, Royal London has calculated that those who contribute only at the minimum rate to a workplace pension, or who do not take up the full match, are missing out on additional employer ‘matching’ contributions worth around £2 billion each year. Around 3.2 million workers are missing out on an average of around £650 per year each.
One firm – Nationwide – recently changed its pension policy to deal with this problem. Despite offering a generous additional ‘employer matched contribution’ for those who saved more than the minimum, only around 1 in 10 members of the scheme were taking full advantage. Nationwide switched to making the *maximum* contribution the standard for employees, leaving them free to opt for a lower contribution if they wished. Now more than 8 in 10 members are benefiting from the maximum employer match.
Where an individual contributes £1 to a pension and receives standard rate tax relief, the cost to them is 80p. If the employer matches the full £1 contribution, this means that an 80p ‘investment’ by the worker generates £2 in the pension scheme.
It is estimated that someone on average earnings who chose at age 40 to take full advantage of an additional 3% employer matched contribution would have an income in retirement nearly £3,500 per year higher than someone who only contributed at the minimum level. This could make the difference between an income in retirement of £19,050 without the extra contributions and one of £22,500 for those who took up the full employer match.
Commenting, Royal London Director of Policy, Steve Webb said:
‘Millions of workers are missing out on ‘buy-one, get-one-free’ money from their employer in the form of ‘matching’ pension contributions. At a time when money is tight for many people and pay rises may be limited, getting your employer to contribute more to your pension can be a very cost-effective strategy. When individuals are thinking about where to put their money to get the best return, the chance to more than double your money through an employer contribution and tax relief from the government takes a lot of beating’.
‘Much more needs to be done to make workers aware of the money their employer will add to their pension if they are willing to contribute at a slightly higher level. Employees need to find out if their employer offers additional matching pension contributions and give serious consideration to increasing their contributions if they can afford to so. Where the individual has other financial options, they may find it helpful to seek independent advice”.
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Notes to editors
1. Examples of large employers with additional matching arrangements include:
- Compass Group – employees can choose to pay between 3% and 6% of their salary into the ‘CRISP’ pension scheme and get a pound-for-pound match from the employer; https://www.compass-pensions.co.uk/45/64/contributions
- Intercontinental Hotel Group – most employees can make a contribution of 3%, 4% or 5% and the employer will add between one-and-a-half and four times as much, depending on seniority;https://www.ihgplc.com/investors/shareholder-centre/annual-reports-and-responsible-business-reports – p68 of annual report;
- Royal Mail Group – for employees with more than 12 months’ service, contribution rates are 4%/5%/6% and the employer match is 7%/8%/9% respectively; the default after 12 months is 5% plus 8% http://www.royalmailgroup.com/sites/default/files/SF_PSE_PN_%20August_2015.pdf (p7);
- Vodafone – employees can contribute 1%/3%/4%/5% and receive an employer contribution of double this amount; http://www.vodafonepensionsupdate.co.uk/q_and_as/the_dc_plan#q3
- Bae Systems – have a ‘core’ employee contribution of 4%, with the option to pay 5% or 6%; the employer pays 6% / 7% / 8% respectively; https://www.baesystemspensions.com/download/1798/BAE+Systems+DCRP+Booklet+October2016.pdf p6
- Next – employees can choose between paying 3% or 5% and the employer will provide a matching contribution http://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/2017/Copy%20of%20WEBSITE%20FINAL%20PDF.pdf p76
- Tesco PLC – basic contribution by employees into their Defined Contribution pension scheme is 4%, matched with a 4% employer contribution; but workers can increase their contribution to 7.5% and receive a pound-for-pound match; (http://www.usdaw.org.uk/CMSPages/GetFile.aspx?guid=07138294-35db-475e-bf69-d86f242f2ffa)
2. Key assumptions
a) Approximately 10.5 million people work for firms which employ 250 people or more (source: Department for Business, Innovation and Skills, Business Population Estimates 2016);
b) Around three quarters of FTSE 250 companies offer only Defined Contribution pensions to all staff (source: Willis Towers Watson DC survey 2017); means around 7.85m work for firms with DC only arrangements; this will be an under-estimate of scale of the problem as excludes DC scheme members in employers with DB and DC arrangements;
c) Roughly 64% of schemes use a ‘flat contribution plus matching’ structure (source: Willis Towers Watson as above); so approx. 5m work for firms in this situation;
d) Exclude approx. 10% of workforce opted out of pension scheme (based on auto-enrolment opt-out rates reported by DWP for larger firms), leaves 4.5m workers;
e) Assume maximum employer top-up is 3% of salary (based on sample survey of schemes);
f) Assume 44% of workers contribute at minimum level, 27% between minimum and maximum and 29% at maximum level (based on survey of schemes);
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with Group funds under management of £104.5 billion. Group businesses provide around 9.0 million policies and employ 3,341 people. (Figures quoted are as at 31 March 2017)