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- The pension provision offered for auto-enrolment should also serve an employer’s workforce planning strategy and wider business interests.
- Employers that want to continue using their pension to boost recruitment and retention may have to raise the stakes and make sure their offering stands out from the crowd.
- Auto-enrolment could actually perpetuate a myth that people do not need to worry about retirement at all beyond making their regular contributions.
The pension reforms are fast approaching, but many employers still have doubts over how the new regime will work in practice and whether it will have the desired effect on workplace savings, says Nick Martindale
The introduction of auto-enrolment, starting with the largest employers in October this year, will be the biggest shake-up of workplace pensions in a generation, with organisations obliged to enrol all employees aged over 22 who earn more than £8,105 a year into an existing scheme or an alternative arrangement.
The move is designed to encourage employees to take more responsibility in saving for their retirement, but even at this stage much remains unclear, especially around the number of employees who
are likely to opt out and just how the new regime will operate in practice.
The new system will challenge the way pensions have traditionally been perceived, both by employers and the wider workforce. Ian Hodson, reward and benefits manager at the University of Lincoln, says there is a risk that employees will come to regard pensions as a default benefit, potentially removing the recruitment and retention advantages that employers have enjoyed in the past
by offering an attractive pension scheme.
“In the public sector, pensions are often seen as a given, so the challenge is to help employees understand the value of a pension and that actually there is no right to it,” says Hodson. “It has got to be seen not as compliance, but as a positive reward package.”
Employers that want to continue using pensions to gain competitive advantage in recruitment and retention may have to raise the stakes further. Richard Wilson, senior policy adviser at the National Association of Pension Funds, says: “If everyone has a basic pension on offer and that becomes the standard, employers will have to do something different to stand out from the crowd.
“As more people build up money, it could also change employees’ attitudes and they may become more interested and engaged.”
The way employers handle this issue is likely to vary dramatically. James Kirkland, head of pensions, benefits and recognition at Telefonica, draws a distinction between larger organisations that will want to implement the new regime by the book, and less scrupulous ones that will try to circumvent the legislation.
“The big ones will do a good job in terms of making it a differentiator and people will value it because they will realise it is costing the employer,” he says. “It will be a good job well done.”
But this will not necessarily be the case with all organisations, particularly smaller ones, warns Kirkland.
It is also very important that the pension arrangement offered for auto-enrolment serves the employer’s workforce planning strategy and wider business interests, says Tim Middleton, technical consultant at the Pensions Management Institute.
“Historically, defined benefit (DB) schemes were a very effective way of getting people out of a business,” he says. “We are now going into an era where people simply cannot afford to retire any more. If we can build up the pension system in such a way that it actually serves the employer’s interests, in that it allows [it] to get people in and out of the business, that would be an important incentive.”
But employers have genuine concerns over how auto-enrolment will work, and top of the list is cost. Jamie Fiveash, director of customer solutions at B&CE, which runs The People’s Pension, explains that many people are living week-by-week at the moment.
“The money is just not on the table,” he says. “They† would like to think long term, but it’s just not possible. The economic climate is a big factor in this; the introduction [of auto-enrolment] for smaller employers has been delayed for a reason.
“But in 2016 and 2017, smaller employers are going to go from [paying contributions of] 1% to 2% to 3% in a very short space of time. I would be very surprised if that actually happens because if they can’t afford 1% in four years’ time, how are they going to afford to go from 1% to 3% in the space of 18 months?”
Another concern is the timing of the new regime. Kirkland points to the lack of clarity that has existed around the legislation until late in the day, and says this could have been improved, enabling smaller employers, in particular, to learn from the experiences of others.
“It would have been nice to have seen the legislation earlier and been able to hammer out these early structures,” he says. “If the big organisations could do that quickly, then the little ones could just use products that had already been created by the industry. But it’s going to be just over 18 months before most employers come in, so there will be a lot of pressure over the next few months on in-house people.”
Rosemary Lemon, group head of reward and executive remuneration at Legal and General, says retailers will struggle more than employers in other sectors. “They have resources, but they also have a very large number of employees and a young, transient, changing population who aren’t really thinking about pensions and think they can’t afford it,” she says. “I really feel for those sorts of organisations in trying to implement this, with the complexity of it. I once worked for a retailer where we had only 30% of employees in the pension plan, and that was quite good. It’s going to be a big headache.”
This is also a concern for Telefonica’s Kirkland, who says pension take-up is low among the firm’s retail staff. “Maybe 10% of retail workers join pensions currently and we regularly hit them hard with lots of messages, but it’s always the store managers who join,” he says. “We currently offer a 4%:10% match, so they have to find 4%. But most staff join [the company] for the staff discounts. They want to get an iPhone.”
However, Kirkland hopes auto-enrolment will be a trigger for more staff to join the pension scheme. “We have found that once people are in, they are better employees,” he says. “Their performance scores are better and they tend to stay longer.”
But Rosemary Mounce, group pensions manager at Arup, is concerned that auto-enrolment could actually lead to fewer people in the organisation’s scheme because of the need to highlight the opportunities to opt out. “We have 90% already in the scheme and we think we’ll lose people,” she says. “It’s very hard to work out how to opt out of our scheme. We don’t force people into it, but it pulls them in. Auto-enrolment will do the opposite.”
Whether auto-enrolment will work in terms of encouraging more staff to save for retirement is another issue. Lemon says many staff will struggle to afford the minimum contributions outlined by the government, and warns that employers may have to make arrangements for such people even if they opt out. “It is important that if people do opt out, there is still that layer of pension there that they can afford to contribute into,” she says.
Pauline Sibbit, a partner at law firm Sackers, says that in future, employers will have to take on a bigger role in helping staff plan how they will fund their retirement. “I don’t think we have actually got to the point yet where people aren’t retiring because they don’t have enough money, but it will happen,” she says. “A lot of employers are going to have to think about what to do to help people go into retirement with a good income.”
Lincoln University’s Hodson says there is also a risk that auto-enrolment could actually perpetuate a myth that people do not need to worry about retirement at all beyond making their regular contributions. “We could have an age where people have been in an auto-enrolment pension scheme and believe it will look after them in retirement, when the reality is that when they get there, they don’t know what sort of pension it is going to create for them,” he says.
Other measures will be needed to help overcome this threat, including abolition of the current means testing system for aspects of pension provision, says B&CE’s Fiveash. “The critical thing is to make sure people’s expectations are right in terms of what they will end up with, and certainly 8% is not going to be enough for income replacement,” he says.
Arup’s Mounce, meanwhile, thinks changes will be needed to the current annuity system, which remains mandatory for those with smaller pension pots. “There are not many good-quality annuities that people will get for up to £50,000,” she says. “There must be something there for people with small pots at the end. The idea of tax-free lump sums has been quite exciting, but at the moment employees still have to apply for a dreadful annuity.”
This is likely to become more of an issue as people move jobs and a flexible system allowing individuals to access multiple small pension pots will be needed to convince them to continue saving, says Mounce.
Ultimately, the success of auto-enrolment in tackling the problem of people not saving enough for their retirement will depend largely on the number of employees who decide to remain enrolled.
“You also have to allow for things like the intervention of Fleet Street,” says the Pensions Management Institute’s Middleton. “If one of the tabloid newspapers took the view that auto-enrolment is little more than a tax on business and publishes on its front page the steps employees need to take to opt out, that could have a huge impact,” he says.
For now, it seems, the jury is very much out on the impact of the reforms.
Read more from the Auto-enrolment roundtable