Workplace Pensions – why are employees leaving their schemes?


Millions of employees could be in for a shock in April when their take-home pay is reduced by an increase in their pension contributions. This could trigger a further exodus from the workplace retirement schemes involved, particularly in London where the cost of living is so high and, the wages for many workers means that they cannot afford any additional expense.

According to the consultancy Hymans Robertson it is estimated that as many as a third of workers could ditch their pensions because of this rise, which comes just 12 months after the last increase.

Under the government’s automatic enrolment initiative, staff are placed in a workplace pension scheme unless they opt out. The most prevalent minimum employee contribution, which originally started at just 1% of qualifying salary, jumped to 3% last year and, will rise to 5% in April 2019.

Most employers use pension schemes that from April 2019 will require a total minimum of 8% contribution to be paid. The calculation for this type of scheme is based on a specific range of earnings. For the 2019/20 tax year this range is between £6,136 and £50,000 a year These figures are reviewed each year by the government. (

As aside from the above expectation, the number of members leaving the NHS Pension Scheme is five times higher than that recorded by other public pension funds, according to latest figures.

Royal London, which had submitted several freedom of information (FOI) requests to public defined benefit (DB) schemes, warned NHS workers were often giving up pensions worth about nine times the money they save by opting out.

Data from the NHS Business Services Authority issued last October showed 245,561 people had opted out of the scheme between 2015 and 2017.

The latest figure represented about 16 per cent of active members, and compared with 3.4 per cent for the Teachers’ Pension Scheme, 1.45 per cent for the Civil Service Scheme and 0.04 per cent for the Armed Forces Scheme, the mutual insurer said.

According to Royal London, these workers were giving up a number of pension rights – an NHS employee earning £25,000 per year currently has to pay a contribution of 7.1 per cent before tax relief.

After tax relief, opting out would save them £1,420 per year. But replacing that pension in retirement would cost a lump sum of about £13,000 – nine times more.

According to Sir Steve Webb, former pensions minister and director of policy at the mutual insurer, the NHS as an employer “needs to take urgent action to tackle this epidemic of pension opt-outs”.

He said: “All public sector workers have faced a squeeze on their take-home pay in recent years, but it is in the NHS where this has translated into shockingly high numbers of people leaving the pension scheme.

“Those who opt out will save money in the short term, but could lose nine times as much in the long-term in reduced pension rights. The NHS needs to find better ways to communicate the value of NHS pensions, otherwise large numbers of NHS staff risk a retirement in poverty.”

Although concerns about the tapered annual allowance, which came into effect in 2016, have led doctors to leave the pension scheme altogether, Royal London’s data showed younger NHS workers (aged 26-35) were the most common age group to opt out, with 30,000 workers in this age band choosing to do so in 2017 alone.

Royal London that stated across the public sector, employees have faced a number of squeezes on their take-home pay in recent years which may have contributed to high levels of opt outs.

These included a series of public sector pay freezes or below-inflation increases; the ending of contracting out in 2016, which had led to an increase in employee National Insurance contributions; and increased contribution rates into public service pension schemes.

Also, the provider stated while auto-enrolment in the private sector defined contribution (DC) schemes had been phased in very gradually, public sector workers in DB plans were enrolled at the full contribution rate overnight.

This would have been a greater shock to their take-home pay, but it is not yet clear why the impact of these various factors has been so much more acute in the NHS than in other similar pension schemes, Royal London stated. (

The need for professional pension advice has clearly never been more important and as this is a specialist area of advice it is important to seek out this information from an appropriate independent financial adviser. Richmond House Group has this specialist knowledge and are always available to answer your questions.

This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. Investments may fall as well as rise and you may not get back the full amount

John Merrifield. Dip PFS, Cert CII(MP)