A necessary evil
Isla MacFarlaneSenior WriterQuietroom
You know times are tough when a TV show offers to pay your energy bills as a grand prize. Deemed too crass even for daytime TV, the prize was scrubbed from This Morning’s glitzy ‘Spin to Win’ wheel following a public backlash. Nonetheless, with runaway inflation crushing household finances, solutions that go against conventional wisdom may be a necessary evil.
For a number of Brits, this might mean opting out of their workplace pension scheme. Ominous headlines suggest this is already happening. In August, Canada Life released figures which showed that the cost of living crisis has forced 5% of members to halt their pension contributions. The research revealed a further 6% might follow suit.
The findings are echoed in similar studies. A poll by Ipsos, commissioned by NatWest, found that almost 1 in 5 (17%) of those with either a workplace or private pension have already reduced their contributions or stopped them completely.
Scottish Widows, Canada Life, L&G and Aviva have all urged their members not to wring more money from their paycheques by stopping contributions, according to an article in the FT Adviser. However, there are several reasons why such advice should be mothballed.
For a start, pension contributions are whipped away before they hit anyone’s bank account. If someone has never looked up from the bottom line of their payslip, the option of stopping contributions may never have occurred to them. Until they are told not to do it.
Furthermore, someone in real financial difficulty is likely to be deaf to such advice. A typical household is set to have £3,000 wiped from their wallet over the next two years as Britain sees its biggest fall in real pay since 1977, the Resolution Foundation has warned. Meanwhile, a recent survey of the lowest paid public sector workers by Unison showed that nearly a third (31%) are missing meals, with 11% doing so in order for their children to eat. Someone who is cold and hungry now is unlikely to be placated with promises of an idyllic, far-off retirement.
Finally, trying to talk someone out of stopping contributions could easily be misconstrued as trying to hold onto their hard-earned money. It also goes against the grain of common mantras which seek to ‘empower’ members to take control of their finances. The beauty of auto enrolment is that members can opt in and out as they please, and muting that control is hardly empowering.
Rather than let members slam the door on their way out, pension schemes might do better to hold it open.
Of course, members need to know what they’re giving up. A break of just a few years can lead to a gaping hole in someone’s finances once they retire. Opting out of a workplace pension also means kissing goodbye to employer contributions, an effective pay cut.
But if a member has made up their mind, there are a number of ways that pension schemes can limit the damage:
Members could be invited to reduce their contributions, rather than stop them entirely.
They could be presented with options to automatically re-enrol at a time of their choosing.
An agreement could be struck between the employer and the pension scheme, so that the employer continues their contribution in the absence of the employees’ for an agreed length of time.
Perhaps most importantly, opting back in should be easy. A recent thread on Mumsnet revealed this isn’t always the case. Someone can opt out at the touch of a button, but re-enrolling has proved a Kafkaesque exercise for many.
However unpalatable the idea seems, if someone is determined to opt out of their pension scheme it might be better to respect their choice. If you have supported someone’s decision to leave, they are far more likely to return when the wheel of fortune spins back in their favour.
