Why workplace pension contributions fell last year

Contributions to workplace pension schemes tumbled in the early stages of the pandemic.

New official figures from the Office for National Statistics (ONS) show that employee pension contributions fell by 11%, with employer contributions down by 5%.

These figures compare workplace pension contributions between the first and second quarters of last year, showing the initial impact of the pandemic on levels of retirement savings.

According to the figures, membership of workplace defined contribution pension schemes remained steady at the end of June last year, with 23 million members in the UK.

However, despite the same level of workplace pension membership, the amount withdrawn from these pension schemes fell by 4%, with a total of £13.2bn in total pension payments and income withdrawals.

There was a 5% increase in the amount of lump sum payments between the final quarter of 2019 and the second quarter of 2020, reaching £2.7bn in total.

Andrew Tully, technical director at Canada Life, said: “Today’s publications from the ONS provides an interesting snapshot of the UK pension system over what has been a turbulent period and certainly presents a number of areas for the industry and Government to pay close attention to in the future.

“While it’s good to see that pension scheme membership has remained relatively positive, it’s worrying that employee and employer contributions to DC schemes have fallen by 11% and 5% respectively.

“As a nation we are already chronically under-saving for our retirement and as we move out of the Coronavirus crisis it’s important we find ways to increase this pension saving back, at least, to previous levels.”

One factor behind reduced pension contributions from employers and employees is likely to be the levels of furlough, with reduced salaries and only minimum amounts paid into pension schemes. Research by Fidelity found that out of the approximate 3.6 million workers who have been furloughed, 38% have made changes to their retirement plans as a result of Covid-19.

Furloughed workers are also seeing their retirement age pushed back by up to 2.5 years, with 37% still uncertain about their ability to afford their desired retirement lifestyle.

Maike Currie, investment director at Fidelity International, said “In addition, DC membership slowed to a crawl between April and June last year, reaching just over 23 million by the end of the second quarter – a small 0.6% increase compared to 22.4 million DC pension schemes at the end of 2019.

“Looking ahead, employers need to be on the front foot when it comes to supporting their staff’s retirement decisions. After months of contributions being paused, workers need to feel confident about either restarting or reassessing their pension plans for the future.”

While the next release of official figures, covering the second half of last year, is likely to paint a more positive picture, the economic situation at the start of this year is less positive. However, the vaccine rollout gives cause for a degree of optimism in the medium term.

If you would like to discuss the issues raised here, please do not hesitate to contact us.

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