02 Jul 2014
Peter Mutch, Corporate Benefits Director, says Auto-enrolment is on course to breathe new life into pension saving and highlights the hidden factors could affect its fate.
Peter Mutch , Corporate Benefits Director, says pension auto-enrolment is on course to breathe new life into pension saving and highlights the hidden factors could affect its fate.
Between 2012 and 2018, every employer in the UK needs to have a workplace pension scheme in place and start enrolling workers. Many will be automatically enrolled and others will need to be enrolled if they request it.
Over a five year period, 1.2 million employers are going to enrole 11 million eligible workers. A new generation of savers will start putting money into a pension – often for the first time.
Each employer has a set staging date by when to do this based on their payroll . There are compulsory pension contributions from both employers and employees. These will be introduced gradually on a sliding scale until reaching the maximum contribution levels in 2018.
Auto-enrolment is on course to breathe new life into pension saving. But what hidden factors could affect its fate?
As the focus of auto-enrolment shifts from large organisations in low numbers to smaller businesses in high volumes, a picture is already emerging of the future workplace pensions landscape. Millions more people saving for retirement but the bonus of single-figure opt-out rates are contrasted with comparatively low contributions being paid.
This year sees the first big test for auto-enrolment. During its first 14 months, auto-enrolment saw more than 3,000 of the UK’s largest employers reach their staging date.
However, in the first six months of 2014, nearly 30,000 employers will reach their staging date, which has led to concerns about a ‘capacity crunch’.
The industry estimates pension providers can write about 2,100 new pension plans each month and although there are now more than 70 master trust arrangements available for employers to choose from, there is still a big shortfall in capacity.
Many Employers have not yet started auto-enrolment preparations despite being only weeks away from their staging date. These Employers are now under real pressure to find a provider quickly but there is no guarantee their existing provider or provider of choice has the capability or the appetite to provide a compliant scheme. The consequence of this last minute rush will undoubtedly be a capacity crunch.
Employers that have already staged acknowledge that the process was far more difficult than they initially envisaged, and organisations should not be complacent, because 2014 has implications as well.
Towers Watson’s Benefits health check survey, published in February, concluded that 16% of staged employers are already planning to switch their defined contribution pension provider. Mostly because their provider is not meeting their administration needs.
These employers may indeed need to review the new technical solutions that have been launched for dealing with auto-enrolment compliance.
Some sections of the pensions and payroll industry were slow to develop robust systems, but as new systems offering complete end-to-end solutions are rolled out, organisations may be tempted to assess how their current arrangements compare. Many of these systems offer potential savings in HR time and cost within areas such as communications and cleansing data.
Employers also need to keep an eye on government actions around auto-enrolment because we already have had two waves of amendments to the initial regulations.
Auto-enrolment is one of the biggest legislative changes that employers have had to deal with for years, and a massive burden for business owners, yet the government has just not provided adequate support.
Research conducted by financial research organisation Defaqto on behalf of Now: Pensions, published in January surveyed 264 independent financial advisers. They found that 89% of respondents are concerned that employers lack the knowledge to make informed decisions about appropriate auto-enrolment products for their employees.
Employers yet to stage need to ensure that auto-enrolment is firmly on their radar screens to avoid the hefty fines associated with non-compliance.
Until auto-enrolment, simply having a half-decent pension scheme in place may have been enough to distinguish an organisation’s benefits provision from its peers. But the days of haves and have-nots will soon be no more, so how can employers set their scheme apart? The crude answer is to pay in more: the Pensions Quality Mark (PQM) from the National Association of Pension Schemes sets its standard at 10%.
But despite signs that the economy is in ruder health, raising contributions at this time remains, for some, a distant possibility. In any case, employees must be dissuaded from thinking that minimum contributions alone will fund a comfortable retirement. The difference between 8% and 10% may seem an irrelevance, but the reality is anything but.
Promoting better financial education is a well-trodden path, but now is a better time than ever. The flat-rate state pension should provide greater clarity on the actual level of benefits that employees can expect from the state. It also opens up the opportunity to re-engage with staff in middle age and get them thinking more seriously about their future.
It comes down to what an employer wants from its pension scheme. Is it compliance with their duties, or a retention tool that makes a more positive difference to employees’ futures? The success of any scheme hinges on what is paid in, and the hard truth is that for many, auto-enrolment minima will not hit the heights of employees’ retirement ambitions