Pensions Management Institute: Mending the holes of the pension pocket for the quantum workforce
The below article was published in Pensions Aspects Magazine, a Pensions Management Institute publiation. Original text is available here.
COVID-19 has accelerated the disruption to the UK’s job market, catalysing an ongoing decline in permanent employment. Now, one in seven workers in the UK are on ﬂexible contracts, up 25% over two decades. These workers are part of the growing quantum employment ﬂeet, deﬁned as a contractor working small, incremental jobs across a range of employers or end clients. Today, it is not uncommon for contractors to work just a morning or even a number of hours one day with one employer and then work double shifts later that week for a different client.
The quantum employment era is highly beneﬁcial to the UK economy, with workers able to spread their skills across multiple end clients to secure ﬁnancial stability. Meanwhile, businesses are able to ﬂex their staff and contractor capacity as required. Agility will be key for businesses as the UK approaches the end of furlough, triggering a signiﬁcant change for the job market. However, as more people join the quantum workforce and more businesses look to new hires to keep operational, keeping up with pension contributions will become increasingly more difficult.
Pension contributions for the labour market as a whole have been impacted by COVID, with more than ﬁve million workers cutting or stopping their pension contributions altogether. However, this impact has been most strongly felt by those quantum workers who are self-employed, with recent research from the Institute of Fiscal Studies revealing only one in six contractors now contribute into a pension pot, which has fallen from around half in the late Nineties.
Pensions’ fall from grace
For employed workers, auto-enrolment has been a great success; a pension system designed for predictable 9-5 roles and jobs for life. Workers are assessed and enrolled in the scheme passively, not needing to think about or do anything to contribute. However, with the continual rise in the number of quantum workers; we need to think carefully about how this success can be carried over into this growing workforce.
For quantum workers employed through multiple employers it can be a little more difficult; their slice of earnings from each job can often be under the threshold for pension autoenrolment, increasing the difficulty of contributing pensions passively. Intermediaries such as umbrella companies can help in this respect whereby earnings are consolidated under one employment and accurate contributions can be made.
The aforementioned fall in pension provisions for self-employed workers is driven by a complication of several factors, with a major one being the basic nature of pensions for self-employed workers, currently estimated to be 4.53 million. For self-employed workers, pension contributions are an active conscious decision. Pensions aren’t the easiest to get your head around and the options available are numerous, so many people can either be over-awed by them, or see it as ‘tomorrow’s job’. Who hasn’t thought they are young enough to put pension contributions off? So, with quantum employment increasing, how do we ensure that more of the selfemployed are putting into a pension?
Levelling the pension playing ﬁeld
The goal has to be to see the uptake in pension contributions for the self-employed at the same level as employed workers and the only way to achieve this is to take the complexity and thought out of the process. It needs to be, like auto-enrolment, a passive process. Intermediaries such as agencies or umbrella companies who receive the funds before sending onto the self-employed are ideally placed to manage contributions for any auto-enrolment for the self-employed scheme.
These organisations could offer the ability for freelancers and contractors alike to collate their work and streamline their ﬁnances, assisting signiﬁcantly with any pension contributions. Without legal reforms this is impossible, so the government needs to drive this change. Requiring the self-employed to have a nominal amount of their invoice (this could be a percentage of invoice between qualifying amounts to mirror the existing auto-enrolment for instance) siphoned into a pension, we’d certainly see a higher amount of pension contributions from the self-employed. We predict a system similar in structure to this could positively impact about one-third of those in quantum employment. After supporting a signiﬁcant chunk of ﬂexible workers with new legislation, the government would then be able to tackle other areas of complication, to close the gap between employees and their future savings.
The intermediaries handling the payments can be seen as the ‘middle men’ and have a fuller picture of quantum workers’ earnings. With the ultimate overview of a contractor’s work, these companies could offer self-employed pension auto-enrolment, alleviating the hassle of navigating the complicated pension landscape. Providing the element of passive contributions for pensions before an invoice is processed makes pensions easy and convenient for the quantum workforce. This is a great beneﬁt for securing the temporary labour market’s future, especially during such uncertain times.
However, this middle layer of business can still be encumbered by manual processes, which slow down and even prevent accurate pension deductions being taken. These businesses should look to advance their technology systems to be speciﬁcally designed for the temporary labour market.
Solutions designed for quantum employment remove the need for manual intervention for pension contribution uploads, eliminating the risk of incorrect submissions. These systems are also capable of looking across the pension submission history of an employee and reconciling this in real-time.
However, for the ‘solopreneurs’ who operate without the cover of an umbrella company or recruitment agency, managing pensions would still remain complicated, with added challenges for those who work ‘cash in hand’. Without an intermediary assisting in the automatic deduction of contributions more innovative ideas such as invoicing and accounting solutions that automatically handle pension postings for the self-employed and their accountants would be needed. One thing is clear: legal changes are required to ensure this valuable section of the UK’s workforce can save for their future without having to negotiate the pensions mineﬁeld alone.
As more workers move to quantum employment, it’s vital their long term ﬁnancial stability is secure. While often at the back of the mind for employees, pensions are an integral part of working life and shouldn’t be subject to outdated systems and legislation that is unable to keep up with the pace of work. It’s important that those who support the quantum workforce have automated and smart processes which break down the barriers to pensions. This is especially important in today’s climate, where securing the ﬁnancial future of workers will be essential to mitigate long term risk to the economy.
By Matt Jennings, Client Solutions Manager, My Digital