If you read nothing else, read this …
- Even though employers will be required to auto-enrol staff into a pension scheme under the 2012 reforms, this will not mean staff will automatically engage with it.
- This may affect decisions about employer contribution levels and whether to pay above the minimum.
- Communicating the positive impact of saving for retirement is key to boosting staff engagement.
Case study: First Group stays on schedule for pension reforms
To prepare for auto-enrolment, First Group is making changes to its pension arrangements and focusing on employee engagement.
The company’s staging date is April 2013, when staff will be auto-enrolled into a new defined contribution (DC) scheme offering phased contributions which will reach 5% for both employer and employee. Until then, new members will continue to enrol into the transport operator’s defined benefit (DB) pension scheme.
First Group has begun developing a website which will have tools to enable staff to establish their risk appetite and tolerance. They can either use a pre-packaged diversified investment strategy appropriate to their risk appetite and age, or make bespoke investment choices.
The firm has yet to finalise its auto-enrolment communications, but John Chilman, group reward and pensions director, says conveying the changes in a positive light is a priority. “We do not want colleagues to think of auto-enrolment as a tax. For many, they will gain much more immediate access to pensions.
“We will explain that this is a valuable benefit, and even more so if they stay with First Group and can then move into the DB section. However, they have to do nine years in the DC section to get this option.”
Auto-enrolment gives employers an opportunity to convince staff of the value of joining their pension scheme, says Tom Washington
Much has been written about auto-enrolment since it was first set out in the 200 government white paper Personal accounts: A new way to save. Nearly six years on, and less than 12 months from these plans becoming a reality for the largest organisations, employers are realising pensions auto-enrolment does not necessarily mean auto-engagement from staff.
Under the new legislation, all employers will have to auto-enrol staff into an occupational pension plan and make contributions on their behalf. Many employers must now decide whether to offer more than the eventual minimum 3% required employer contribution, towards a minimum total input of 8% in employer and staff contributions.
For many employers, the contribution rate they offer will depend on what they can afford. Some may opt for the lowest possible employer contributions.
The fact that all eligible staff will have to decide whether to remain in the scheme or opt out means more people will be thinking about how they are saving for retirement. Some may look at their scheme in more detail, and if offered the bare minimum, may become disengaged and look elsewhere for a better deal.
Research published by Standard Life in October 2011 found that the higher the employer contribution to a scheme, the better the employee engagement. Its Keep on nudging report also found that when pension information is presented clearly and effectively, 82% of staff who would be auto-enrolled would not opt out.
Alexandra Kitching, Pension Quality Mark manager at the National Association of Pension Funds, says pensions will be an important benchmark for employers after auto-enrolment comes into effect. “This is an opportunity that should not be missed when reviewing and putting pension arrangements in place,” she says. “Employers should consider if offering the minimum is in the long-term interest of their business or if they should do more. Offering higher contributions will mean a better outcome for staff and will also mean the pension scheme can be used as a valuable engagement tool.”
Employers must consider carefully what level of contribution to offer. A government consultation on self-certification, which ended in October 2011, outlined three tiers of contribution rates for employers offering a trust-based money purchase scheme, a contract-based DC plan or the money purchase element of a hybrid scheme.
Employers must base their choice on their pay structure and employee demographic, says Jamie Jenkins, head of workplace strategy at Standard Life. “Those with existing arrangements will probably first see if their scheme qualifies without needing changes,” he says. “For example, an employer paying 4% or more of basic pay may simply look to apply an employee minimum to make this up to 9% for the tier one option.
“However, employers setting up a DC scheme for the first time will want to consider their pay structure and how it fits with the various tiers. The key consideration will be the ease of monitoring of pay, how easy it is to track additional elements that are included or excluded from the calculations.”
Toby Christie, employer compliance policy manager at The Pensions Regulator, adds: “The tiered options are an easement designed to help employers with existing schemes that use a different definition of pensionable earnings. Which tier to use will depend on the circumstances of affected employers and their staff. This is an issue on which employers may want to take advice.”
Employees must be made aware that auto-enrolment is a positive approach that will make a big difference for their retirement. The success of auto-enrolment depends on large numbers of people staying in schemes, which will happen only if people see it as a benefit, says Standard Life’s Jenkins.
“If the headlines we create are positive, and saving for retirement with ‘free money’ from employers and the government is seen as a sensible thing to do, it will succeed,” he says. “If it is seen as another tax, it will fail.
“Also, although people will be enrolled without the need for action, there are decisions to be made beyond that, such as contribution levels and investment choices, which should be reviewed from time to time. We need to educate people to a level that they feel confident in looking at such things.”
There is growing interest in financial education in the workplace, with auto-enrolment at the heart of the communication strategy, says Larraine Solomon, principal at Mercer. “Some employers have already embraced auto-enrolment and have a clear plan, but many are only just beginning to think about their communications,” she says. “Many will use this as an opportunity to help employees understand their total reward package and make a real difference to engagement.”
Employers with decent pension schemes will also want to ensure they are getting value for money, says Darren Laverty, partner at Secondsight. “So that when auto-enrolment comes in and non-members are obliged to join, they will not see the contributions as something the employer ‘had to do’ anyway”.
Many employers are using auto-enrolment as an opportunity to convince staff about pensions, says Alex Thurley-Ratcliff, strategic consultant at Shilling Communication. “If they can show an employee who was not in a scheme that they are now certain to be better off in retirement and for only a certain amount out of their take-home pay, then that is a great starting point,” he says.
There has seldom been a more important time to communicate the value of pensions to staff. Remember: nothing is automatic when it comes to engagement.
Under the 2012 pension reforms, employers must ensure their pension scheme meets legislative requirements. A government consultation on self-certification outlined three tiers based on varying contribution rates for employers offering a defined contribution (DC) pension scheme.
Tier 1 option:
A 9% contribution of basic pay (including a 4% employer contribution) for jobholders in the scheme.
Tier 2 option:
An 8% contribution of basic pay (including a 3% employer contribution) for jobholders in the scheme, provided that pensionable pay constitutes at least 85% of the pay bill.
Tier 3 option:
A 7% contribution of pay (with a 3% employer contribution). All pay must