Could businesses survive a recession if the pension age was lowered?

Recently, the independent think tank the Social Market Foundation (SMF) suggested that the UK’s current automatic pension enrolment scheme should be reformed, with measures including lowering the minimum pension age and extending it to lower-paid workers. Such changes would have an impact on the UK’s SMEs and as the UK is expected to enter a recession this year, it’s important to consider whether businesses could survive as finances become increasingly tight.

What are the current automatic pension enrolment rules?

Under the Pensions Act 2008, every UK workplace is obligated to offer a workplace pension scheme and employers are required to contribute to the individual pension plans of employees who pay into this scheme.

Currently, UK employees aged between 22 and State Pension age earning at least £10,000 per year will be automatically enrolled into workplace pension schemes but they have the option to opt out if they wish. The minimum employee contribution is currently 5% of their annual ‘qualifying earnings’ and the minimum employer contribution is 3%.

What changes is the SMF proposing?

The Social Market Foundation has called on the government to speed up its plans to allow workers to be automatically enrolled in workplace pension schemes from the age of 18. The SMF also recommended that employers should make contributions from the first pound earned by an employee, with workers starting to contribute once they earn enough to pay National Insurance. The minimum threshold for paying National Insurance is currently £190 a week.

Such measures suggest that this would lead to increased costs for employers, particularly those who employ many workers under the age of 22. However, 11.3% of 16-24-year-olds are currently unemployed, the highest rate of any age group in the UK, so the likelihood of a lower pension age hitting employers too hard in the pocket is lowered. On the contrary, a pension might serve as an incentive to join the world of work for members of this age group, at a time when employers are still struggling to acquire the talent they need.

Andrew Megson, the CEO of My Pension Expert, says that lowering the pension age may raise concerns for SMEs due to the potential for increased costs, but the issue is complex and could provide numerous benefits for younger staff.

He comments: “With tight finances, especially for SMEs, caused by surging inflation and rising interest rates, some may perceive contributing to more employees’ pension plans as financially burdensome. However, it is crucial for employers to consider the positive effects that encouraging people to start saving from a young age can have within their sector and society as a whole.  

“Young people’s lack of motivation to save for retirement is a common issue, possibly due to the distant time frame and complex procedures. According to research by Hargreaves Lansdown, 70% of young people find their pensions difficult to comprehend, and 24% of those under 35 have no pension savings at all. 

“Encouraging more employees to start saving for retirement from an early age can improve their financial well-being, reducing their financial stress and increasing their sense of security about the future. Furthermore, offering pension benefits to employees from an early age can foster greater loyalty and commitment among younger workers, who may be more likely to remain with their employer for a long time.” 

Daniel Harrison, CEO of True Potential, agrees that lowering the pension could be great for younger employees.

He comments: “It would be a real opportunity for employers to provide a benefit to younger members of their staff. The key, however, is to explain to them why they are being enrolled into a pension and how the employee benefits both from their own contributions as well as their employer’s. 

“I would advise employers to think very carefully about the provider they choose. This should not just be a tick box exercise and instead employers should ask, how does my auto-enrolment provider rate for fund performance, customer service, ease of use, availability of technology? If you want your employees to value the benefit, they need to be able to see it.”

Considering the potential impact widening the scheme would have on SMEs’ finances, Harrison also says that the government could make it easier to fund workplace pensions by scrapping the planned rise in corporation tax and providing SMEs with enough notice so employers can factor any changes into their financial plans.

Would lowering the pension age affect the number of people opting out of pension schemes?

With many young people being unsure of a pension’s benefits, it’s also important to consider whether lowering the minimum pension age would lead to a mass exodus from workplace pension schemes.

Pensions Minister Laura Trott was quoted by the BBC saying that automatic enrolment had “transformed pension saving”, with more than 10.8 million workers enrolled into a workplace pension and an additional £33bn saved in real terms in 2021 compared with 2012. This suggests that the likelihood of young people opting out is low.

However, according to the Department for Work and Pensions, there has been a long-term increase in the number of people opting out since late 2020, with the maximum increase in the number of people opting out coinciding with the Covid-19 lockdowns. Plus, a study from Cushon found that 45% of businesses with more than 500 employees reported that some workers are already leaving pension schemes, and 40% reported that some employees are reducing their contributions to survive the cost-of-living crisis.

So, as the cost-of-living crisis continues to put people under pressure, who’s to say more won’t be opting out soon, especially young people, many of whom are already unsure of how saving into a pension is beneficial for them?

Where lowering the pension age is concerned, however, Harrison believes it’s unlikely there would be an increase in opt-outs, but this depends on how well the employer embraces it. He says: “If they see it as a valuable perk for their employees and take time to explain the impact it will have on their futures, there should be no increase in people choosing to opt-out.”  

Megson is uncertain what impact this would have on participation in mandatory pension schemes, but says several factors could potentially affect whether employees would opt out of their scheme or continue to contribute.

He continues: “Lowering the minimum pension age could alter employees’ perception of retirement age, potentially leading to increased participation in the scheme. Conversely, younger workers may prioritize immediate financial needs over long-term retirement savings, particularly if they have debt or other obligations. 

“However, attractive benefits or more manageable contribution structures could encourage younger workers to remain enrolled in the pension scheme. Additionally, educating younger workers on the benefits of early retirement savings could encourage participation. As such, it’s vital that the government focuses on improving pension policy and offering better support for employers, as well as better support for financial advice. 

“At the end of the day, it always pays to plan ahead and contribute as much as possible into one’s pension pot, as early as possible. And, of course, savers should seek independent financial advice when in doubt. In doing so, young people can ensure they are on track to a financially secure future.” 

For Harrison, lowering the pension age is essential for helping young people to secure their futures too.

He concludes: “Prices are clearly higher today than a year ago and that is placing more pressure on household budgets, although hopefully most of this is short-term. But there is a much deeper crisis looming that could last decades because quite simply not enough people are saving sufficiently into their pension to give them a comfortable retirement. 

“By the time they realise, it may be too late to make enough of a difference. That’s why enrolling people into pensions earlier and increasing the contribution rates are key to averting much deeper and more protracted financial hardship later.”