Auto-enrolment and the future of workplace savings

Employee Benefits assembled a panel of industry commentators to discuss recent developments in workplace savings and the impact of pensions auto-enrolment. Padraig Floyd reports

Workplace savings benefits have developed rapidly in a market where regulation is reinforcing the need for employees to save for their retirement.

On the eve of auto-enrolment, we gathered experts together to debate how workplace saving has developed and where it is likely to lead next.

“The main change I have seen is we have moved from pure discussion, theory and vapourware into reality,” says Emma Douglas, head of workplace savings at Mercer. “Corporate platforms are now up and running, with employees accessing wider savings products through the workplace. The focus remains very much on pensions and it is a brave new world of offering savings to employees.”

Auto-enrolment is focusing employers’ minds on pensions, says Ken Anderson, head of DC solutions at Xafinity, but there is a broader savings element available. “One employer we are working with has very low pensions take-up, but investment around shares in their sharesave arrangement is very high, so they are interested in corporate Isas. It really depends on the culture and type of employer as to how broad this broader savings network is.”

Alan Morahan, head of DC consulting at Punter Southall, says his clients have experienced different needs. “We don’t have any corporate clients banging on our door about workplace savings beyond the pension arena. It is an area we have been working on, but we can’t find much interest within our own client bank as so much focus is on auto-enrolment. A survey we brought out this year fully backed that up, with only 2% of employers saying they were interested in introducing a corporate Isa.”

Additional saving

About 14% said they were offering some form of additional saving through the workplace, says Morahan, and of those, about 11% were offering share save schemes with the rest in corporate Isas.

There is an interest in workplace savings, says Charles Cotton, performance and reward adviser for the Chartered
Institute of Personnel and Development, but few employers have started providing such benefits. “Many employers are still trying to work out the business case in terms of challenges or opportunities that workplace savings are trying to meet, and how such schemes fit within business and reward strategies,” he says.

“Another concern among organisations, especially at this time when many employees have not had pay rises or may even have pay cuts, is that introducing such schemes may come across as a bit Marie Antoinette-ish.”

Malcolm Small, senior adviser on pensions policy at the Institute of Directors, says that in research two years ago, IoD members were asked about their expected main source of retirement income. Then, 18% said they expected it to come from non-pension saving, but now that figure is 29%. “Of that 29%, two thirds expect it to come from a stocks-and shares Isa and a third are talking about buy-to-let property,” he says.

Two years ago, it was the reverse: two-thirds thought their main source of retirement income would come from buy-to-let property and one-third were talking about a stocks-and-shares Isa. Small adds: “IoD members are typically smaller employers or entrepreneurs, and more than 1,500 people respond to our pension surveys. It implies that where people have a choice about how to save for retirement, they are increasingly starting to choose other ways than a pension.”

Many of them will also be higher-rate taxpayers, says Padraig Floyd, contributing editor of Workplace Savings Quarterly, so they may have seen their opportunities to save undermined, or perhaps threatened in the future.

Small agrees the restrictions on pension saving are seeing more and more people reaching the lifetime allowance. “There is a trend to look at other vehicles for retirement and that can include general investment accounts and a range of different things,” he says. “We have underestimated the extent to which employers and employees have disengaged from pensions as a vehicle.”

Good thing to do

Douglas believes the groundswell of demand from individuals and supply from the industry will ultimately mean employers can understand that workplace saving is a good thing to do because their employees want it. “However, at the moment employers are putting a lid on this,” she says. “They have plenty of other things to worry about at the moment. They have cost constraints and some of them are worried about the risk as well.”

Referring to reputational risk, Douglas says giving employees too much freedom to put their money into something other than long-term savings could result in them telling their employer at the age of 60 that they will not be able to retire for another 10 or 15 years because they put all their money into an Isa and blew it on a holiday. “That is not a good position for the employer to be in,” she says.

There is a lot of focus on supporting DC pensions properly, but to make other savings, such as Isas, meaningful,employers have to understand what staff are saving for, says Anderson. “You are then entering the realm of advice.You can see the merits in building up something that is accessible, but employers are often waiting before taking a position on this.”

So, Floyd asks, what has been the impact to auto-enrolment?

Small says it is clear from his research that the smaller the employer, the higher the opt-out rate expected. Two years ago, two-thirds of employers expected 20% or more staff would opt out and half of those employers expected a 40% rate, with all citing affordability as the main issue. “After four years of really tough conditions and effective pay cuts, the pips are really squeaking and they just can’t afford anything,” says Small. “We have just re-run that research and now two thirds expect 40% or more of their employees to opt out.” Larger employers think fewer people will opt out, he adds, while smaller employers expect more.

“We won’t see the overall result until 2017, but some early auto-enrolment, even in quite large employers, shows about 40% opting out. You have to ask at what point this is a policy success or failure.”

It all depends on how contributions are phased in, says Cotton. “In the first six or seven months, I don’t think the opt-out rate will be that high, but the danger is that the government, or the regulator, will think auto-enrolment has been successful and take their eye off the ball as the small to medium-sized organisations start to reach their staging date.”

There has been a lot of press coverage of the merits of auto-enrolment, says Employee Benefits editor Debi O’Donovan, so are employers for or against? “You will stand out like a sore thumb if you are doing something untoward,” says Cotton. “Our members will comply with it because that is the law. Most will then try to ensure they get some return on investment from the process and use it as a method to talk to people about the other benefits they offer, how these can support people’s dreams or aspirations when they come to the end of their working life and want to pursue other interests.”

Coaching and mentoring

Cotton wonders whether there will be a phase of coaching and mentoring where, rather than dumping resources on
people’s desks, employers start to have engaged conversations with staff about their aspirations on wealth creation.

Anderson says it depends a lot on the workforce rather than the size of the employer. “Engagement is key. The worst thing an employer can possibly do is not communicate properly and go along the generic communications route, because people just do not understand.”

The other issue to consider is demographic, says Cotton. The increase in the state pension age means people will be leaving work at 68, possibly 70 or higher. This, coupled with the ending of the default retirement age, unless the employer can objectively justify them having to go, staff will be able to stay on at work for longer. “In some instances, I am sure employers will be happy to maintain these skills, attitudes and values, but in others they may not, because those individuals are only at work because they can’t afford to retire, possibly because their default fund has not deliver the size of fund that they had expected,” says Cotton.

Floyd asks whether that means employees can be encouraged to see auto-enrolment, and all it brings with it, as an opportunity to really look at their succession planning.

Pensions were designed as an employer benefit to help organisations manage their workforce, says Cotton. “I am sure we will be going back to that approach over time: organisations saying the reason they have a pension in place is to help them to discover, develop and deploy talent and then, hopefully, dispose of them with an amount of dignity, rather than Dignitas.”

Conversations are happening between employers and employees, says Small. “Employers are waking up to the idea that if you want somebody to retire, you have to make it economically possible for them to do so.”

Finally, the panel were asked how they see workplace savings developing. “I don’t think there will be much further progression in any other form of workplace savings until we are over the peak of auto-enrolment,” says Morahan. “I would like to see something better in the area of investment, so that part of the what-if could have a degree of certainty. That would be beneficial in the DC market, but does comes at a cost.”

Anderson says savings delivery vehicles will continue to develop as employers recognise that it is required;
they just don’t want the cost of it at the moment, or the responsibility. “We will increasingly see master trust types of arrangements and they will grow in popularity,” he says. “We need to get back to what is important and that is about going back to the regulator’s six principles and look at how to get meaningful outcomes for individuals. The bit I am intrigued to see develop is a common regulator.”

Welcome development

Having just one approach to how a DC scheme should be run and managed for workplace saving would be a very
welcome development, Anderson adds.

Douglas says there will be more users of wider workplace savings. “Auto-enrolment is a priority, but there is more discussion around future-proofing into an overall benefit and reward strategy that can evolve into wider savings.”

Providers will also look to add other financial products, such as insurance and debt management, and that may
attract interest and users, says Douglas. “What would really help is some safe harbour legislation for employers and people who are offering pensions and †benefits. If we did, it might open some creativity and more willingness to help employees in the workplace.”

Small says: “Auto-enrolment is the only game in town and we won’t see great structural change in the next few years.” He expects opt-out rates of up to 50% or 55% and questions whether this would qualify auto-enrolment as a policy success. “I am getting the increasing impression that we might have to move to compulsion and the obligation to contribute might be on the employer.

“The single, most important thing I would like to see delivered is the fl at rate, basic state pension. Unless we get that, we cannot put our hands on our hearts and look a modest earner in the eye and say it is safe to save in a pension.”

As more people start to see a greater proportion of their retirement income come from DC, there will be more focus on DC, says Cotton. “Then I believe you will see pressure from politicians and the media for certain minimum underpins or guarantees. We will start to see The Pensions Regulator and the Financial Services Authority getting more involved and more legislation from politicians to try to ensure a certain minimum return. I hope auto-enrolment encourages more people to save more, even if they decide that a pension isn’t for them, and start saving in another vehicle instead.

“Hopefully, something will happen to our culture where people realise that if they want a comfortable retirement, it’s up to them to try to ensure this.”

Read more articles from the Workplace Savings Quarterly