You might not be making the most of your workplace pension – here’s what to do

James Rowe: Nearly half of all UK adults paying into a defined contribution workplace pension have no idea how much their employer contributes. Is that ignorance harming our retirement planning? We'll chat about that on this episode of Which? Money.

Hello, it's James in the Which? Studio alongside two of our pensions specialists. First of all, Paul Davies. Paul, hello.

Paul Davies: Hello there.

James Rowe: And Holly Lanyon. Holly, hello.

Holly Lanyon: Hi, yeah.

James Rowe: Nice to have you both with us. Happy Pension Awareness Week to you both. I know you've probably been celebrating pretty hard.

Holly, to celebrate in fact, you've been doing some research into workplace pensions. Do you want to just tell us why you were looking into this and some of the key findings as well?

Holly Lanyon: So when it comes to workplace pensions, there's a huge variety in what people offer. On the one hand, a generous scheme can add thousands to your pension pot each year. On the other hand, information about employer pension contributions isn't always that clear and easy to find. You might often see a pension listed as a benefit on a job ad, but if you look into it, it's actually the legal minimum that your employer needs to contribute.

So yeah, exactly to celebrate Pension Awareness Week, we wanted to look into how people view their workplace pensions, how well they understand them, and how they see them in relation to other benefits.

James Rowe: And looking into this as part of your research, you've been speaking to members of the public to find out how much people actually know about their workplace pension – because it is a sizeable part of the money we will rely on come retirement. And there's a lot of people out there who don't know enough, I think that's fair to say, isn't it?

Holly Lanyon: Yeah, so we surveyed around 1,200 working adults, and we found that almost half who are paying into a defined contribution pension don't know what their employer contributes. But as I said at the beginning, it can make a big difference. You might have an employer offering sometimes up to 15-20% of your salary, or sometimes they'll offer match contributions. But we also found that around a fifth of people didn't know if their employer offers that.

James Rowe: And another stat – not to just go stat, stat, stat crazy – but 30% of working adults say employer contributions are in the top three benefits. So just 30% of the people you surveyed considered that as one of the key benefits for them, whereas from my perspective, I would say it definitely is, and probably should be for a lot of people, because it can add up to a lot of money in the long run, can't it?

Holly Lanyon: Yes, and this was where there was a little bit of a mismatch. We asked people generally, "Are you likely to take the level of employer pension contributions into account when choosing a new job?" And over half, about 55% of people, said, "Yes, I'm likely to take them into account."

But then we asked people which would be the three most important benefits – only three in 10 got counted employer pension contributions in their top three benefits when considering a job offer, ranking behind paid sick pay, flexible working hours, and holiday allowance. And one in six said they're unlikely to take them into account at all.

Paul Davies: This really surprised me. I guess that sick pay is very important, and holiday entitlement, that's something nice to think about. And flexible working, which is I guess more important now than it used to be, and that there's much more going on.

But pension contributions were down with results for private medical insurance, for example, and employer discounts, which again are nice to have. Nice to have a cheap gym membership, for example, or cheap meals at local restaurants, something like that. But surely your pension contributions are more important than that. And yeah, that was where the overall results surprised me a little bit.

James Rowe: And workplace pensions became a lot more significant – was it back in 2012 when auto-enrolment became a thing from the government? Do you want to talk us through just how it changed in 2012 and what the rules actually say?

Paul Davies: Yeah, of course. Good knowledge, 2012.

So before then, obviously lots of workplace schemes existed, but people didn't have to join, and lots of people didn't. So the trend before then was participation in private pension schemes was dropping off. And with increasing life expectancy, people living for longer and having to build up a bigger pot to fund their retirement, this was obviously a problem.
So the government of the time brought in this system where people are auto-enrolled into pension schemes with the option to opt out. And so it's been a big win, a big success to be honest. At that time in 2012, I think the proportion of people that were part of a workplace pension scheme – and this is among eligible workers – was around 55%, so just over half. And last year, that had risen to 82%, so four out of five people who could join a pension scheme were actually part of a pension scheme and contributing.

James Rowe: So it's undoubtedly been a success, hasn't it, in those 14 years or so since it was introduced, to increase the amount of people who were actively engaged in saving for retirement.

Paul Davies: It has. There's been lots of changes in pensions over the last 14 years – from pension auto-enrolment, pension freedoms, lots of changes around tax, which come up every budget and which leave people a bit confused to be honest.

James Rowe: And it's just round the corner, we'll be confused again.

Paul Davies: Exactly, sounds like a podcast coming down the line.

But I'd say that this change, this development, has been the biggest success in the pensions industry over that period, probably over the last two decades.

James Rowe: And there are certain rules to workplace auto-enrolment – and I won't get bogged down in them here, plenty of information on our website of course, just check the show notes for useful links. But I think something Holly mentioned before, Paul, about how a workplace pension can be considered a perk, and on a job advert it might be listed under a perk – but just to reiterate, it's a legal obligation for workplaces, isn't it?

Paul Davies: It is. There are minimum levels that your employer has to contribute. So that's 3% of your earnings – it's actually 3% of your earnings up to £50,270. So if you're a higher earner, it's up to your company if they want to contribute pension payments on the income above that level. I think you'll find that most do. It's a minimum level, but most companies go that extra step to make sure that higher earners get a bigger chunk put into their pension.

James Rowe: And speaking about employers making those contributions, I think it's fair to say that some employers are more generous than others. So there's that minimum limit of 3%, but there are some employers that will go above that as well.

Paul Davies: Yes, employers have several options. As I say, the bare minimum is 3% on just that lower level of earnings up to £50,270 if you earn up to that amount.

But there's other options for employers. It could be 3% across all of your earnings. It could be a higher percentage, say 7% or 8%. Or as Holly mentioned earlier, there's something called pension matching. So say you are prepared to put 10% of your salary into a pension, your employer might match that. And that's always worth asking if your employer will be happy to match your pension contributions, because obviously that's going to be a very nice chunk going into your pension.

James Rowe: And Holly, that's why it's so important to go back to some of the stats you mentioned before about so many people not knowing about how much their employer contributes. If they were to find out that their employer matches their contributions, maybe it would encourage people to think, "Well, I'm only contributing 5%, am I going to up it to 10%?" And, "I've just looked and my employer matches to 10% – let's do it," because it's going to pay off double if you pay in and they pay in even extra as well, won't they?

Holly Lanyon: Yeah, exactly. Sometimes they call it the hidden pay rise, because it can make such a difference to what you receive from your employer each year.

James Rowe: I wonder if we can paint a bit of a picture about what employer contributions can look like. Say we had a certain salary and an employer was to contribute the minimum, and then a bit more and a bit more. Have you got any numbers that you can help paint a picture with?

Holly Lanyon: Yeah, in terms of the amount that would go into your pension pot each year, for someone earning the average salary – so that's around £39,000 – if they were contributing at the automatic enrolment minimum rate, so 5% from the employee and 3% from the employer, they'd save £2,624 into their pension pot each year.

If you were matching, so it was 5% employee and 5% employer, that goes up by £656. But for a more generous scheme, say you've got a situation where your employer's paying in 10% and you're paying in 5%, you're looking at saving nearly five grand into your pension pot – so you're saving £4,920 each year, which is nearly £2,300 more than if you were saving at that basic statutory level.

James Rowe: And those numbers are big, but we're only looking at that across one year.

Holly Lanyon: Well, exactly, yeah. The compound investment growth is what's going to make a really big difference to your pension over time. There was some new analysis from Standard Life looking at – they analysed some government modelling, and estimate that around two-thirds of the value of a typical pension pot actually comes from compound growth. So yeah, making as much as you can from employer contributions and giving them time to grow is what's going to give your pension its best bet over the long run.

Paul Davies: Yeah, Holly mentioned compound interest, and without getting too mathematical – if your my A-level results suggest that I shouldn't – so that's where you get growth on your base amount, and the next year the percentage growth will apply again to the base amount and to the extra bit where the original lump sum has gone up.

And so this is often called a snowball effect, so year after year you're getting growth on your growth, if you like, and you can pretty soon get to a situation where your pot grows quite substantially.

James Rowe: Because I think a lot of people probably either don't know or forget that a pension is just effectively some type of investment. So naturally, that is how they manage to, as you said, snowball in size. A lot of people just don't know how it works. Do you think if more people knew that, and knew that – as Holly said – I'm just looking at a lovely chart on a piece you wrote for the Which website: 65% of a typical £100,000 pot is made up from this compound investment growth. 65%. If more people knew that, do you think more people would be inclined or encouraged to contribute more?

Paul Davies: Possibly. As with all investments, it can work both ways, and your investments can drop. We've had a period of sustained growth. Again, I'm sure there've been other podcasts on the AI bubble and whether that's going to last and what that means for all investments, which could come to fruition in the next few years.

But you're right, contributions matter. But starting at an early age to make sure that the compound effect can last over as long a period as possible is important.

Holly Lanyon: And I think in general with pensions, I think this was kind of what we were trying to get at with the research, is especially at a time for younger savers when it can be difficult to put anything away, let alone kind of think about the future, it's just understanding that it's not all down to you. So you've got at least something from your employer, and potentially more that you can make of it. Hopefully you'll have compound interest growth, you'll get tax relief from the government. And hopefully understanding that can make it feel a little bit less overwhelming.

Paul Davies: Yeah, I think that's key. We know there's been periods, and there will be periods, where your financial budget is stretched. But hopefully you won't opt out of your pension.

I had a situation where when my wife had our two kids, we stopped her contributions for a while because it was tight. Money was tight, and we were having to pay for various things, including childcare, which costs a fortune. But looking back, should we have done that? Probably not, but we started it again a few years ago.

But I'm aware we can sit here and say, "These are the targets, this is how much you should put away," but real life comes into play as well.

James Rowe: It's interesting though, actually, because you've been in that situation. It's all well and good for us to sit here and talk through the numbers and explain how it works, but for somebody who's been in that situation where you have had pension contributions through your wife which you decide to stop, and then you have the benefit of hindsight to look back and think, "Oh well, maybe we shouldn't have done that," maybe that puts you in a better position because you've seen both sides of the story in a way.

Paul Davies: Yeah, so in a good position to pass on some tips to people. But I guess my point is that we're realistic about some of these figures. It's great to aim for – I think I used my five-a-day analogy previously, where maybe you don't manage your five-a-day, but you manage three-a-day, which is better than none. So it can sort of apply to how much you're putting into your pension and making sure that you keep up contributions.

James Rowe: Again, I don't want to get bogged down – well, I do want to get bogged down in the stats because I do like to look at the numbers. 46% of savers in the highest earnings quartile – that's a bit of a mouthful – receive at least 6% of gross pay, compared with just 22% of those in the lowest quartile. What we're looking at there is that higher earners are getting bigger pension contributions from their employers. Is that right?

Holly Lanyon: Yeah, that was from a recent report from the Institute for Fiscal Studies. So yeah, there's a huge variation in what employers offer, but unfortunately it isn't distributed equally. So yeah, those who earn the most are actually more likely to have a more generous pension scheme. And I think there was an even starker difference across the industries that you work in.

James Rowe: I've got the numbers, I can bring you the numbers. 52% of savers in accommodation and food services received the statutory minimum, compared with just 5% of those in finance and insurance. Again, that just sort of speaks to that other stat we just mentioned about the difference that you will see depending on what your salary looks like.

Paul Davies: It does, and the two go hand-in-hand to some extent. People with lower salary levels in those industries that you mentioned will have lesser benefits than in certain other sectors. So a low salary will come alongside low contribution rates into your pension, so it's a lose-lose situation in that regard.

James Rowe: And I suppose we're kind of just hypothesising here, but do we know why that's the case? Because when you think of it on the surface, in an ideal world, you'd want it to be the other way around. You'd want these lower earners getting higher contributions, wouldn't you, in an ideal world?

Paul Davies: You would, and that's been looked at as part of the Pensions Commission, which we'll come on to later, I'm sure. But I guess it's certain industries where the margins are lower and money's tight, and particularly in something like hospitality, where companies are being pushed from other directions via taxes, etc. And so the wages are relatively low, and companies or businesses can't afford to pay people that much in terms of pensions.

James Rowe: You mentioned the Pensions Commission, and I think we've spoken about it on the podcast as well over the past few weeks and months. This is the government plan to look at and review how it can help and encourage more people to save even more for retirement.

Paul, do you want to talk us through what we think could change off the back of this?

Paul Davies: Yeah, of course. So the Pensions Commission is due to report in the first quarter of next year, so it's a huge review of how people save towards their pension and whether certain groups are undersaving.

So the top-line figure used when the review was launched was that 15 million people of working age are undersaving for their pension, so that's four in 10 workers. A huge proportion of the workforce.

So the review's looking at various things, mainly about pension adequacy – so whether the amount people are saving is enough to give them a comfortable retirement that they expect. So we're awaiting the findings, but they're also looking at how certain smaller groups save for retirement.

Holly Lanyon: Yes, so we've been talking a lot about workplace pensions, and the good thing obviously about automatic enrolment is that even if you're not fully aware of how your scheme works, if you earn over the earning threshold of £10,000, you're most likely saving into a pension.

But obviously if you're self-employed, there's no such equivalent scheme, and it can mean, yeah, there are many more steps you have to take to be actually saving for retirement. 

And I think there were some DWP figures – I think just 17% of self-employed people are saving into a pension, and that drops down to just 4% of people, those who earn only through self-employment. So I think a big part of the Pensions Commission will be looking at what a pension solution could look like for people who are self-employed.

Paul Davies: Yeah, and it's a good point. There's been talk about compulsion for self-employed people, so self-employed people would be compelled to put money into a pension. 

That's a tricky issue really, because obviously income levels can rise and fall quite markedly if you're self-employed. Some self-employed people work seasonally or work when they can, so that's a big issue.

So that's being looked at, as well as the auto-enrolment contribution levels. So we talked about that earlier: it's 5% from you as an employee, including tax relief, and 3% including from employers as a minimum.

But can these be raised, and what does that mean for people? What does that mean for people's living standards now? So obviously looking to the future when they're retired, but you don't want to take out so much that people suffer now.

James Rowe: I don't envy anybody who's on the Pensions Commission, trying to figure out how they can come up with any recommendations, because at the end of the day, it's going to involve either employees paying more or employers paying more, surely? And for a lot of employees, they don't want to pay any more, and employers are stretched as well, they don't want to pay any more, do they? So it's going to be a tricky balance to find a solution, isn't it?

Paul Davies: I think you're right, and the target of getting people to save more is obviously admirable, but getting there is difficult. It sort of feels like auto-enrolment initially was pitched at the right level, but where we go from here, whether we can increase contribution rates or whether it's the right thing to do, as you say, I'm glad I'm not on the commission.

So we can distill the results when they come next year, but it's intriguing to see what happens. And there's a parallel review of the state pension age. So that's going up to 67 at the moment. It is due to go up to 68 between 2044 and 2046, but the likelihood is that that will be brought forward.

So again, it's a bit of a double-edged sword really, because we're asking people to provide for themselves and make sure they're contributing as much, but then we're saying, "Well, at the same time, you're going to have to wait for longer for the state pension." So the government in a way is working against that a little bit, but as we've said before, the figures in terms of what the state pension costs are huge, and that's tied to life expectancy and fairness, intergenerational fairness. Is it right that the workers today support state pensioners from a certain age, or should that be later? But yeah, as you say, there's so much to consider. And yeah, I imagine a few podcasts in the new year once the results are published.

James Rowe: I think so, and we're talking in a week where it looks like the state pension is going to increase to above £13,000 as well for next year. So there's plenty going on.
There's plenty for people who are in the workforce currently. They see the state pension rise, they see the challenges for themselves to contribute to a workplace pension. It's understandable why a lot of people might think it is so unrealistic to be able to save enough for retirement, isn't it?

Holly Lanyon: But I guess there are small steps you can take that can hopefully make it feel a little bit less daunting. Even if it's just first taking that simple step of – if you've got a workplace pension – finding out what your employer contributes, scoping out if there's any possibility of getting more from them, just knowing how many pensions you've got.

I think the average lost pension pot is worth around 10k, so really worth just taking stock if you can find any old paperwork that will help you dig out a lost pot. Yeah, just some small things you can do that will hopefully help you get the most out of what is available to you at the moment.

Paul Davies: Yeah, I was jotting down some notes, and I wrote down the three Ts actually, which is trace, total, and target.

James Rowe: Very good.

Paul Davies: So trace is tracing lost pensions. I worked for an insurance company at the back end of the 90s for a couple of years, and it was quite a big company, but I've been trying to trace whether I had a pension for ages, and I've not quite got there.

James Rowe: So even you struggle?

Paul Davies: Well, I can't remember whether I was provided with a pension, but I assume I should have been. This insurance company ceased to be a few years afterwards, because it was divided up and different units were purchased. So that made it trickier, but it is harder than you think. So I keep sharing my rubbish experiences of pensions, but it just goes to show what goes on. But yeah, the government tracing service is good, so try and trace your pension.

So total: we talked about looking at your statements, and we know people have various pensions, so it is quite nice just to total up what you've got. It sounds simple, but that can be quite a nice boost to be honest. You might be doing better than you think across various pots. So try and get to a running total, and there's various calculators, including our own calculator, where you can project that forward. Say if you carry on saving at the same level for the next few years until retirement, what you might end up with.

And then target is the Retirement Living Standards from Pensions UK, which we talk about a lot.

James Rowe: Yeah, they're a good benchmark, aren't they? They give you a bit of an idea about how much you might need come retirement.

Paul Davies: They are. They're a great benchmark. The criticism is that they seem quite high, and they don't take into account housing costs. There's various ways they might be improved, but they are an excellent way to start to think the sort of income you might need in retirement.

James Rowe: But quite frightening as well, is it fair to say? Say you look at a figure and it says you might need £600,000 to live comfortably in retirement, that can be a pretty eye-opening figure to look at, can't it?

Paul Davies: Yeah, so the comfortable level is the top of the three. Sometimes I think that feels sort of average, but the moderate level is as a couple and as a single person, you're looking at a total pot of between £350,000 and £400,000.

The figures for a single person always look worse, because fixed costs can't be split in two. So if you're looking at your broadband, your home insurance, your energy costs – and also when we do the calculations, a couple will benefit from two state pensions, so we assume that people are receiving a state pension, and also two tax-free allowances. So two lumps where they can receive income without paying tax. So the figures always look worse for single people than a couple.

But I agree with your point, overall there's some pretty chunky figures there, and you may not hit those targets, but again, it's a good aspiration.

James Rowe: Remind us of the three Ts before we wrap up.

Paul Davies: Trace, total, and target.

James Rowe: Okay, we'll not forget those.

We will wrap up in just a second. Any final reflections – either on anything we've discussed or any part of your research that you did, Holly, that you want to give a quick mention to?

Holly Lanyon: I guess one thing we didn't touch on too much is the option of – how difficult it is often to save, but especially if you can't afford to increase your ongoing contributions, most of the time you'll have the option just to make a one-off contribution. I think in our survey, three-quarters of workers with a defined contribution pension have never done that, but it can be an option, a way to boost your pot a little bit, put something more in there that can benefit from compound growth. You might as well be able to use bonus sacrifice if your employer offers it, which will save you more on National Insurance contributions.

So yeah, there are options to top up your pension a little bit more flexibly if you can't afford to increase your regular contributions, for example.

James Rowe: And a good time for that might be if you get a workplace bonus, for example.

Holly Lanyon: Exactly, if you get a bonus or if you get a pay rise or something like that.

James Rowe: And Paul, any final thoughts, final reflections before we leave?

Paul Davies: I guess it's back to some of the great stats around workplace pensions and whether people are aware of how much they get via their workplace pension, and how important they deem pension contributions.

I guess people change jobs quite often these days – we've talked about this a lot, so I think it's 11 jobs on average. So you're talking about lots of interviews there and lots of contracts to look at, and just keep it in mind. When you're at a job interview, just ask the question, "What are pension contributions?" I think it probably reflects well on you in that you're interested in that as an important matter, and ask the question of pension matching. An employer isn't going to take offence at you asking about how much you can push it in terms of pension contributions.

So just be aware of how important pensions are, and that's your opportunity really, isn't it, to ask about how much might go into your pension and to even push it a little bit.

James Rowe: I think we'll leave it there, but before you go – I know you both work across pensions and retirement all the time here at Which – are you working on anything interesting, or anything coming up that we should keep an eye on?

Paul Davies: So I'm looking at companies that provide pension drawdown. That's one of your options when you come to retire. So we talked a lot about building up your pot, so eventually you have to use that. So many people now opt for drawdown where you keep it invested and pull out chunks when you need it, so it's becoming a more popular product. And I'm doing lots of analysis on companies and the charges that they actually make, so watch this space.

James Rowe: We will indeed. And Holly, what about you?

Holly Lanyon: We've been chatting a lot today obviously about saving for retirement, but a part of my job that I really enjoy is also speaking to people who have retired about the process of – well, how do you come to that decision, what are the various decisions you have to make about drawing an income from your pension, how do you find that process, how do you adjust to life after work? So yeah, hoping to be working on some more of those case study led stories.

James Rowe: Lovely stuff, we'll keep an eye out. Holly, thanks very much for your time.

Holly Lanyon: Thanks, James.

James Rowe: And Paul, thank you.

Paul Davies: Thanks, James.

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