Discussing a savings revolution in private pension provision

John Greenwood leads a roundtable discussion with six industry experts on the challenges created by pension auto-enrolment

Taking the right pension contribution from the salaries of 12 million employees is an enormous undertaking for UK employers. For many organisations, finding the money to match those contributions is an equally huge challenge.

Just how big a job is faced by the nation’s 1.3 million employers in automatically enrolling millions of qualifying employees into pension schemes is reflected by the five-year timetable the government has set for the task. Experts put the administrative cost of compliance and finding the money for employer contributions as the biggest challenges for firms.

“Admin is probably the bigger challenge for bigger employers, which means working out when you can and can’t enroll people, who you approach, and what you have to do if they opt out,” says Jim Bligh, head of employee relations and pensions at the CBI. “But as smaller companies come on stream the cost pressure on the employer of making the extra contributions is likely to be the bigger problem.”

Starting in October 2012 with the largest employers, and running through to April 2017 for the very smallest employers, the implementation of the government’s auto-enrolment policy will require employers to assess every single one of their employees against set contribution criteria, deduct money from their pay packet without their consent and maintain a record to show they have complied.

People should think very long and hard before opting out because they are losing out on employer contribution

Figuring out exactly who needs to be automatically enrolled is not always straightforward. Identifying jobholders over 22 and below state pension age, earning more than the personal allowance for income tax, is straightforward enough. But experts say uncertainty remains over whether some people, who are on the face of it self-employed, need to be included. The new regulations state that an individual considered by HM Revenue & Customs as self-employed for tax purposes may still be classed as a “worker” under the new employer duties legislation, if they are in fact working under a personal contract of services. How these regulations will ultimately be interpreted will be determined by the courts.

“Understanding the boundary between contracts for employment and contracts of employment is a minefield for employers,” says Jamie Fiveash, director of customer solutions at pension provider B&CE. “We will only know precisely what the rules are when it has all been clarified by case law.”

While employers with just a handful of staff will usually be able to figure out who needs to be automatically enrolled by following a checklist on The Pension Regulator’s website, larger employers face a massive data processing exercise to comply, particularly where companies have expanded through acquisition.

“Employers will need to know how each bit of their software is going to be interrogated to get the right data out of their payroll systems,” says Tim Jones, chief executive of the National Employment Savings Trust (NEST), the pension provider established by the government to help facilitate auto-enrolment. “Then they will need to decide whether they are going to carry out this operation through the HR system, through the payroll provider or get their pension provider to do it for them.”

Record-keeping will be a big burden for employers, as the law requires them to keep a record of earnings and contributions, the dates contributions were made, and the date opt-out and opt-in notices were served on staff. The official regulator’s website contains detailed guidance for larger employers and interactive tools for smaller employers to help with this. Employers also need to understand that auto-enrolment will cause problems for employees as well, which is why pensions professionals emphasise the importance of backing up implementation with a clear communication programme.

“Ideally, you want employees to engage with auto-enrolment at the outset. You do not want people realising they have been automatically enrolled when it is too late for them to get their money back. Otherwise, if you miss the 30-day opt-out window, you will end up with lots of legacy pots holding just a few pounds that you will have to administer for years to come,” says Mr Fiveash.

Most pension providers will give communication materials for free and, for larger schemes, will brand that in the companies’ own corporate livery.

One of the most significant challenges for the entire auto-enrolment project is managing employees opting out of the scheme, a problem which is currently exacerbated by the disincentive to save caused by the means-tested benefits that pensioners currently receive in retirement.

Ros Altmann, director-general of Saga and a campaigner for pensioners’ rights, says: “Pensions may not be a sensible investment for the people auto-enrolment is supposed to be helping. They may be at risk of losing some or all of their pension savings if they end up in means-tested benefits in retirement.”

Under current state pension and benefit rules some individuals would be no better off in retirement even though they had saved in a pension. The government is currently consulting on a proposal to increase basic state pension to above the level of Pension Credit, the minimum income the government says a pensioner needs to live off.

“Yes, the government has discussed radical reform of means-testing to address this issue, but we have not seen the details yet. And for anyone who has big debts or student loans, it is debatable whether they should be paying into a pension or paying their debts off first,” says Dr Altmann.

Nigel Stanley, head of campaigns at the TUC, believes this problem is being overstated. He says: “This argument about means-testing is a bit of a red herring. Anyone who thinks they know what means-tested benefits will be by the time they come to retire must have a very good crystal ball. The vast majority of people will be better off saving in a pension and the government is planning to move to a higher basic state pension, which should do more to address the problem.

“People should think very long and hard before opting out because for every £1 they don’t save, they are losing out on £1 of employer contribution and tax relief.”

Mr Stanley points out that workers are allowed to take their pension as a cash lump sum, a quarter of it tax-free, if their entire pot is below £18,000.

He is more concerned at the possibility that a minority of rogue employers will attempt to get out of paying the pension contributions they are required to by auto-enrolment, as has happened with holiday pay and sick pay.

“The worry is not that employers will deliberately flout the law, but will use more subtle ways to get their staff to opt out of the pension scheme,” he says. “They may do this without actually saying anything, but by making clear they consider you a better employee if you do not sign up. Those that do opt out then might find they get more overtime or get other preferential treatment.”

Failing to comply with auto-enrolment rules is a criminal offence, carrying a penalty of up to two years’ imprisonment or a £5,000 fine. Actively encouraging employees to opt out is one of the things that will incur the wrath of the regulator.

“We will police auto-enrolment by looking out for unusual patterns of opt-out. So if geographically or in certain sectors there are higher levels of opt-out, we will look more closely at those sectors. We will also be sampling employers, so they may get a request from us to come and talk to them in the future. And importantly we will be relying on whistleblowers,” says Charles Counsell, executive director for employer compliance at The Pensions Regulator.

“Where things are done not deliberately we will not be taking enforcement action, but where there is persistent and deliberate avoidance, we will take more robust steps.”

But despite all these problems, the CBI is encouraging employers to make a virtue of the challenges auto-enrolment brings.

Mr Bligh says: “Smaller companies should use auto-enrolment as an opportunity to rethink their reward options for their employees. That means sitting down and talking to their employees and asking them what they want from their pensions, and how that will sit with the share options and other benefits that the company may offer. They may then wish to speak to HR consultants, accountants or independent financial advisers about how best to structure their benefits package.”

And whatever specific challenges employers have with auto-enrolment, the further in advance they are addressed, the easier it will be to cope with them.

“The key is to put someone in your organisation in charge of auto-enrolment at least 18 months before your staging date so they can start getting their head round what it means,” says Mr Jones.

It may be no action is required straightaway, but in light of the magnitude of the auto-enrolment implementation project, smart decisions made early will save a lot of legwork down the line.