Auto-enrolment and compulsory employer contributions are due to be introduced in 2012, but it doesn't hurt to think ahead
Employers without a company-supported pension scheme have been happily drifting along for years. From 2012 that will all change when the government's new National Pension Savings Scheme (NPSS) comes into effect. This will require employers to auto-enrol staff into either the NPSS or a scheme with provisions deemed adequate to exempt the employer from offering access to the new scheme.
The aim of the NPSS is to provide low cost pension provision for those who might not otherwise save. Under the scheme, employees will pay contributions of around 4% of earnings, while employers will pay 3% and 1% will come from the government in tax relief. That compares to an average employer contribution into a defined contribution scheme of around 6%.
Every employee aged 22 years and over, earning more than £5,000 a year and not already contributing to a pension will be automatically enrolled into one of these personal accounts, but will be able to opt out of the arrangement if they wish.
The new scheme will present significant costs for employers, not to mention an extra administrative burden. Even an existing good quality defined contribution scheme may not be sufficient to obtain an exemption. To be deemed adequate, an existing scheme must match the NPSS's contribution structure, offer a default investment fund and auto-enrol non-members every three years and all new joiners.
Opt-in costs
The biggest bugbear is the auto-enrolment requirement, which is set to result in a much higher take-up rate than if employees were left to actively choose to opt in, therefore potentially leading to higher contribution costs.
Although the final charging structure for the new scheme will probably not be announced until the autumn, it is likely to be lower than that for stakeholder schemes, which charge a minimal 1%. If the marketplace feels compelled to reduce its charges to match the NPSS, this will leave little room for providers to charge commission, and makes them unlikely to give any free financial advice or education to staff on top. This will leave the employer in the position of either paying separately for financial education or advice or scrapping it altogether. However, a feasibility study into a national approach to generic financial advice around the NPSS is being conducted by the chief executive of Aegon UK, Otto Thoresen and is due to report at the end of 2007.
Complications
There is also the issue of whether an employee should be advised to remain opted into the NPSS, which will be far more complicated than it may at first appear. The Pensions Policy Institute produced a paper detailing the groups of employees who might lose out, entitled Are Personal Accounts Suitable for All, last November. These groups include people on very low earnings, women who have had career breaks, people in their 40s and 50s, people with extended periods of self-employment and those who are not married. Many factors that influence the outcome are impossible to predict, such as whether the employee will be living with a spouse in retirement.
Niki Cleal, PPI director, says: "The PPI's analysis shows that young people are likely to get a good effective rate of return if they contribute to the scheme throughout their working lives. But a combination of career breaks and low earnings can increase the risk of finding [the NPSS] unsuitable."
Single people aged in their 20s who join up and subsequently have periods of self-employment may be better off staying out of the scheme in the first place. Critics say that young people will have to save consistently for many years before the contributions will amount to anything. David Barker, managing consultant at Mercer Human Resource Consulting says: "It will [be] 20 years in the future before the contributions amount to much more than offsetting means-tested benefits. Who will advise people on opting out?"
For employers, the temptation will be to trade down pension contributions to the NPSS standard to save the organisation some costs. The Association of British Insurers has tried unsuccessfully to put pressure on the government to cap annual contributions into the NPSS at £3,000 (instead of £5,000) to ensure the scheme does not erode existing provision, and has been pushing to ward off a relaxation of the regulatory regime for the NPSS compared with other schemes. Debate is still continuing around the original proposal that transfers between pension schemes would be prohibited, but there are signs that this may be allowed for very small amounts where this is done to consolidate small pots built up in an employee's previous jobs.
Although employers have until 2012 for the NPSS to become a reality, they would do well to start thinking about its implications as soon as possible.