Why we will all feel the benefit of auto-enrolment pensions in Gibraltar

Gibraltar’s mandatory pension reform will promote financial security and economic stability for all employees; here we consider the societal benefits this will bring.

Gibraltar’s ‘auto enrolment’ pensions journey started on 1 August 2021 when Gibraltar’s biggest employers – so-called ‘Enterprise’ employers with over 250 staff – were required to provide their employees with access to a workplace pension.

Introduced via the Private Sector Pensions Act 2019 it follows the UK’s Auto Enrolment (AE) pensions regime in ensuring that every member of the Gibraltar community, including those working in the private sector, will be financially protected in their later years.

The Act makes it compulsory for all employers in Gibraltar to provide a workplace pension for all employees who are over the age of 15, have worked for an employer for one year or more, and have gross earnings from that employment of £10,000 or more per year.

If an employee elects to join the workplace pension plan, the Act also makes it compulsory for both the employer and employee to contribute a regular minimum amount – 2% of earnings – to the employee’s pension fund.

Implementation has been deliberately phased to give employers more time to adjust to the new requirements. ‘Large’ employers (101 to 250 employees) were required to provide a pension plan to any employee who requests it on 1 July 2022.

Next year, it will be the turn of ‘Medium’ employers (51 to 100 employees), who will need to provide their staff with a pension by 1 July 2025. The process will conclude on 1 July 2027, when ‘Micro’ employers (those with 14 or fewer employees) will be brought into scope.

This legislation can only be a positive thing for Gibraltar. Increases in life expectancy – 65-year-old men and women in the UK, for example are now expected to live for a further 20 and 22 years respectively – represent a significant economic challenge. While this longevity is undoubtedly positive, it places a substantial burden on the allocation of GDP towards pensions. In the UK, government spending on pensions, which stood at around 2% of GDP in the 1950s, has now more than 8%.

The sustainability of the pension system appears precarious at first glance. Future pension liabilities may become too large for taxpayers to bear without drastic cuts in their own standard of living. It is therefore crucial for individuals to plan for their extended lifespans and safeguard their standard of living during retirement.

Another area of concern is the discrepancy between manual and non-manual labour. Individuals with desk jobs typically find it more feasible to extend their working lives than those engaged in physically demanding roles, such as in manufacturing or construction. At the same time, individuals in low-paying jobs that lack workplace pension plan pensions may be compelled to work longer to qualify for their state pension.

Fortunately, policymakers have been actively responding to these challenges and there have been some promising developments. In the UK, AE’s most celebrated success has been in increasing overall workplace pension enrolment rates. Since the scheme’s inception in 2012, enrolment rates amongst eligible employees in the private sector have more than doubled, from 42% to 86%. By the end of December 2023, over 11 million workers had been automatically enrolled and over 2.3 million employers had met their duties.

There has been similar success in increasing engagement amongst younger people and workers in basic professions – groups with previously low participation rates. Workplace pension enrolment amongst the youngest qualifying age group (22 to 29 years of age) rose from 39% in 2012 to 86% in 2021 in the UK. Over the same period, the gap in enrolment between professional and basic occupations fell from 44% to 7%.

Encouragingly, many employees and employers also appear to be going beyond minimum contribution rates. Since 2012, the number of eligible private sector employees contributing above the minimum level had increased from 33% to over 50% by 2021. This was observed across all occupation classifications and economic sector types.

“One can only hope that Gibraltar’s workforce will soon be following a similar pattern and will benefit from this increased investment in their future,” said Darren Whitley, Managing Director of Sovereign Pension Services (Gibraltar) Ltd.

“We are seeing a range of enquiries from all sizes of companies in Gibraltar, many of whom are getting in early even where they are smaller, as they also appreciate what a vital staff retention tool a pension is, so the benefits are considerable”.

The shift to auto-enrolment was deemed necessary because of the transition from defined benefit to defined contribution pension schemes over the past generation. Defined contribution schemes, while less costly to maintain, lack the guarantee of a fixed income post-retirement. Consequently, individuals often under-save for retirement because long-term preferences are challenging to ascertain.

Recent HMRC data indicates that UK retirees are demonstrating prudence by resisting the temptation to draw down funds from their pension plans prematurely. Although a substantial £2.06 billion was withdrawn from pension plans in the first quarter of this year, there has been a decline in withdrawals per person and per payment.

“The resilience of this approach during market downturns remains to be seen, but a retirement system that is characterised by delayed retirement, enhanced private savings and prudent spending is essential for preserving public finances and protecting the living standards of future generations,” said Whitley.

How can Sovereign assist?

To assist Gibraltar employers of any size to meet their new ‘auto enrolment’ pension obligations, Sovereign Pension Services can design and set up Occupational Pension Schemes that will satisfy all the criteria under Gibraltar’s Private Sector Pensions Act.

We also have the capacity and expertise to administer these pension plans on behalf of Gibraltar employers, such that clients can be assured of the maximum business benefit and the minimum business disruption.

For more information or to find out how we can help you with an occupational pension, please visit https://www.sovereigngroup.com/our-services/pensions/pensions-locations/gibraltar/ or contact Darren Whitley by phone on +350 200 76173 or by email below.