This year will be a milestone, not just because of the 2012 London Olympics, but for the most radical welfare reforms since the introduction of the old age pension in 1909.
For the first time, from October 1 every employer in the UK, starting with the largest, but ultimately even a mother who pays a nanny, will have to contribute to a pension for their staff.
Eventually, 1.3 million employers will be affected and required to take action to comply with the law.
In contrast, employees are expected to do nothing. Inertia is the buzzword of pension saving and is expected to assist auto-enrolment. For employees, there is no need to sign any forms to find themselves in a pension scheme. This is what is being called auto-enrolment.
It is the government’s long-heralded solution to the pension crisis; only 31 per cent of private sector organisations offer any pension to their staff and millions are sleep walking to their retirement on just the state pension of £107.45 a week.
The Department for Work and Pensions (DWP) estimates auto-enrolment will result in between five and eight million people joining workplace pensions for the first time, saving £5.7 billion (in 2011/12 prices) annually between 2012 and 2050. The one-off cost of implementing this reform is between £1 billion and £3 billion.
Pensions Minister Steve Webb hopes “automatic enrolment into workplace pensions will start the monumental shift we need to get millions more people in Britain saving”, but support from the government has been relatively low-key with a small budget – an £11-million campaign for print, online and outdoor advertising – signposting individuals to www.direct.gov.uk/workplacepension
Changes to the timetable have made it difficult to prepare for one of the biggest changes to the cost of employment for decades. With introduction dates having been moved back several times, some employers do not really take the final published timetable as seriously as they should.
The largest firms are now geared up, but many smaller firms are not, regarding this as an additional tax on jobs. A recent Pensions Regulator survey showed there are many employers who think it will take only a few months to get ready for auto-enrolment and have barely started to think about it yet.
Doug Sawers, managing director at HR and payroll provider Ceridian UK, says firms “underestimate the budgets, resources, systems and time required”.
Auto-enrolment will result in between five and eight million people joining workplace pensions for the first time
Workers who must be auto-enrolled in a pension scheme are deemed to be “eligible jobholders” who are aged between 22 and state pension age, working or ordinarily working in the UK and earning above £8,105 (2012/13 tax year).
The initial minimum employers’ contribution is 1 per cent rising to 3 per cent with the employee contributing 0.8 per cent with 0.2 per cent tax relief in year-one rising to 4 per cent with 1 per cent tax relief – hardly a king’s ransom – by 2018.
Employers need to decide what type of scheme they will use, how they will manage costs and how they will set up the payroll. But, before doing all this, employers must know their staging date. This is the date that the new law applies to their company. They can find this on the Pensions Regulator’s website www.thepensionsregulator.gov.uk which has a mass of material on auto-enrolment.
The Pensions Advisory Service is also a pivotal player. Its chief executive Marta Phillips says: “We are receiving about 140 calls a month on automatic enrolment, of which about 76 per cent are from employers.”
This is not surprising to Will Aitken of pension consultants Towers Watson. He says: “The reality is mind-bogglingly complex. The guidance from the Pensions Regulator runs to around 250 pages and, even then, employers can have to refer back to two acts of parliament, several sets of regulations and additional guidance from the DWP.”
Rachel Brougham, principal at consulting firm Mercer, adds: “Tight timescales, unusual pay periods, out-of-the-ordinary contracts, variable remuneration, whether individuals are ordinarily working in the UK” are the kinds of problems UK employers are grappling with.
But Kevin LeGrand, principal and head of pensions policy at Buck Consultants, says pensions do not need to be complex. “Don’t be afraid of them and don’t be put off by stories of schemes that have gone wrong; the vast majority of schemes work well,” he says.
Many firms are planning to use their existing pension scheme to meet their auto-enrolment obligations. If an employer needs to select a qualifying scheme, there are a number of alternatives, including the government-backed National Employment Savings Trust (Nest), which has a public service obligation to accept all employers who apply to join it.
This is important, as Andrew Cheseldine, consultant at Lane Clark & Peacock, says: “It is no secret the provider market will be resource-constrained by early-next year and we already know of employers wishing to simply open their existing schemes to all eligible jobholders who have been turned down by their existing providers.”
Other options include Now: Pensions from the Danish ATP pension scheme, servicing 4.7 million members in Denmark, and the People’s Pensions from B&CE, the workplace provider to 1.6 million people in the UK.
Jamie Fiveash, director of customer operations at B&CE, says smaller employers won’t necessarily have the internal expertise. “It is important that their provider can remove as much of the complexity as possible of the entire process from them,” he says. “They will be ill-equipped to do it themselves.”
Auto-enrolment will also have a huge impact on employee benefits; it is a catalyst for many companies to review their packages. So gold-plated packages are likely to be trimmed and pay frozen.
But will the reforms be successful? Towers Watson’s Mr Aitken says: “Our 2012 FTSE 100 survey of DC [defined contribution] schemes shows that, where companies already use auto-enrolment, pension take-up rates are typically 90 per cent plus.
“On the other hand, a recent survey from the National Association of Pension Funds shows that 33 per cent of those who are eligible for auto-enrolment will quit the new pension.”
And even the projected total contribution of 8 per cent of pay by 2018 is far too low to provide a decent replacement pension, but it is a long-overdue start. The 2012 pensions marathon is under starter’s orders.
Six months from staging date, employers should:
- Determine which provider will conduct the regular workforce assessment to determine eligible jobholders and non-eligible jobholders
- Finalise terms and service specification with their auto-enrolment pension provider
- Make and test changes to payroll and HR systems, and finalise communications to employees.
Twelve months from staging date, employers should:
- Establish which staff are going to be auto-enrolled and when
- Confirm what contributions are going to be paid and how they will be calculated
- Begin letting staff know of impending changes; check if they need any additional support from providers and advisers.
Eighteen months from staging date, employers should:
- Check their staging date with the Pensions Regulator
- Look at the finance, contract, payroll and HR implications; begin planning communications
- Decide on the scheme they will use for auto-enrolment (not necessarily their current scheme), what it might cost and what systems might need to change?
Saving beyond auto-enrolment
A male contributing at auto-enrolment level for 46 years and retiring at 66 could end up with a pension of less than £500 a month in today’s terms, according to figures from financial advisers AWD Chase de Vere.
Pension providers point to a huge reality gap in the general understanding of how much pensions will be worth. The average income people think they will need at the age of 70 to be comfortable is £24,500, yet the average income they are projected to receive from age 65, combining both state and private pensions, is just £13,000, research from Scottish Widows shows.
Tom McPhail, head of pensions policy at Hargreaves Lansdown, says: “People visiting our online pensions calculator spend an average of eight minutes working out the different combinations of the income they could get if they changed their contributions or retirement date.
“But we also find that 60 per cent of employees who go to our website ask to speak to an adviser about their affairs, so the value of face-to-face advice or information sessions, in getting the message of saving more over to staff, should not be underestimated.”
Some employees will also save more if they are offered a facility to do so through the workplace, such as an ISA on a company’s benefits portal.
Experts say one of the best ways employers can help employees to make extra provision for their retirement is by getting them to agree to increase their contributions in the future, for example by apportioning part of their annual pay rise towards their pension, a process dubbed auto-escalation.
Figures from Standard Life show that a 25 to 35-year-old median earner, who gradually increases pension contributions by 4 per cent above the auto-enrolment minimum, will increase the size of their pension pot by up to £135,000 on retirement.
John Lawson, head of pensions policy at Standard Life, says: “For older employees, you might suggest they pledge to increase their contributions by 1 per cent a year for four years. Younger workers could be invited to increase contributions by just half-a-per-cent a year and it would still make a big difference.”
Standard Life calculates that employees could save an extra £13 billion to £14 billion a year through adopting auto-escalation or parallel saving through corporate ISAs, doubling the savings prompted by auto-enrolment.
Contribution by JOHN GREENWOOD