When the auto-enrolment process finally got under way in October 2012, no one knew exactly what to expect. For some employers, it was little more than tinkering with an existing system; for others, it was a major project involving entering most of their workforce into a workplace pension scheme for the first time.
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- Most staff are remaining in pension plans once they have been auto-enrolled.
- Many employers are using the opportunity to promote their wider benefits package.
- There is some evidence of employers accompanying auto-enrolment with financial awareness sessions.
- Employers are not cutting other perks to cover auto-enrolment costs, but some insurance policies are being scaled back.
- Some employers are linking benefit and pension schemes to ease administration.
Eight months on, things have become a little clearer. The most striking aspect has been the relatively low level of opt-outs. In the run-up to auto-enrolment, surveys predicted opt-out rates in excess of 30%, but the reality has been different. Will Aitken, senior consultant at Towers Watson, says: “The normal take-up we’ve seen has been 90-95% and that’s pretty much across the board, even in populations that are supposedly very unengaged.”
Pension contribution levels
Employers have also resisted the temptation to level down contributions. Instead, where they had a large non-pensioned population, the tendency has been to create a separate plan, offering the minimum levels of contribution required under auto-enrolment, running alongside an existing scheme.
Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD), says: “There is often a mechanism for people to graduate from that type of arrangement to one that had been offered to existing employees when they have been around for a certain length of time, or have shown a certain amount of commitment to the organisation.”
Over time, this could lead to a levelling down by stealth, Aitken says. “It’s not explicit because people who are already in the scheme are not getting lower contributions, but as time goes on, those new people will become the norm,” he says. “It might only emerge over a decade or so, but it is happening.”
Some employers are using auto-enrolment as part of a broader reward strategy to promote the wider use of benefits and introduce new ones that will help them achieve better staff engagement and retention. “It’s only the larger organisations that have wrestled with this, but there seems to be more of a holistic approach to wealth management, as well as issues around financial literacy and awareness,” says Cotton.
Research conducted by Employee Benefits confirms this. According to The Benefits Research 2013, published in May, 62% of employers said their benefits strategy for 2013 would be influenced directly by auto-enrolment, and 21% by concerns around an ageing workforce.
Philip Smith, principal and head of defined contribution and wealth at Buck Consultants, says: “[Employers] are trying to give employees a wake-up call and show them they won’t be able to walk out of the door at age 55 like the previous generation did. They are beginning to invest in member engagement strategies, putting in place online tools, running seminars and getting people to come into the workplace to offer not necessarily advice but information.”
Financial planning education
Helen Bidgway, head of HR at The Whitgift Foundation, a charity that operates care homes and schools, says the organisation is offering above-minimum contribution levels for staff who are not currently in its existing pension scheme, automatically enrolling them with an employer contribution of 4% and staff putting in 2%. It is also offering financial seminars, provided by Secondsight, to boost take-up.
“We are offering people the opportunity to have a one-to-one session before they join the scheme to make them think about what pensions they already have, and how much they might want on retirement,” she says.
Emma Douglas, head of workplace savings at Mercer, says the launch of auto-enrolment should, in theory, be a good time for employers to think about additional financial products, such as corporate individual savings accounts (Isas).
“It’s a great time to have a conversation about the wider benefits structure, but that has tended not to be the case because people are focused on getting the auto-enrolment bit right,” she says.
The Benefits Research confirms this: the number of employers looking to provide financial advice stood at 17% in 2013, the same as in 2009.
However, some employers are using auto-enrolment as an opportunity to promote their existing benefits offering. Clare Abrahams, head of auto-enrolment at Lorica Employee Benefits, cites fast-food retailer KFC as an example.
“For KFC, it was all about employee engagement, including developing substantial communications and pitching the benefits in a way that would be appreciated by employees,” she says. “It had one-to-one sessions, presentations and workshops, online learning tools, posters in the workplace, training for managers to help communicate the changes to their team members and full benefit branding with sweets, magnets and Post-It notes.
“It is the perfect example of going above and beyond what its statutory duties would require to really help employees understand and embrace their benefits.”
However, there are signs that other businesses may look to reduce benefits, perhaps in order to meet higher-than-expected costs from auto-enrolment. Towers Watson’s Aitken identifies a trend towards fixed-period benefits for group income protection rather than paying out until age 65, as well as higher excesses being introduced around private medical insurance. “It effectively throws some of the cost on to employees,” he says. “This is happening in parallel, but it’s hard to say whether it’s a result of auto-enrolment.”
Buck Consultants’ Smith, meanwhile, suggests there is a move to restrict certain benefits that have traditionally been offered alongside pensions, such as life cover, to those already in existing plans.
“We haven’t seen the extension of benefits packages to those populations in the way you might expect,” he says.
Smith cites the example of one [employer] that was perfectly happy to offer the ‘full-fat’ pension scheme with four-times-salary life cover for people who enrolled voluntarily, but offered just one-times salary to those who were auto-enrolled.
Other employers are using the introduction of auto-enrolment to overhaul how their benefit schemes are set up. James Gilbert, pensions consultant at Thomsons Online Benefits, says some employers have taken the opportunity to consolidate existing benefits in their flexible and total reward packages.
“Where auto-enrolment has required the implementation of technology to minimise the administrative burden, it has made sense to put other existing benefits online to increase engagement,” says Gilbert. “This makes particular sense where salary sacrifice is involved, because the production of successive consolidated agreements is vital for the scheme to be effective.”
Others have moved to synchronise auto-enrolment with wider benefits windows or particular times of year. Bidgway says the Whitgift Foundation tends to have a lot of new starters at the beginning of the academic year in September, so it will be enrolling them ahead of its official October start date.
For employers that have yet to go through the process, it is the administration that emerges as the most cumbersome aspect. “The pensions part of auto-enrolment is relatively simple,” says Smith. “The difficult part is interpreting the legislation, making sure you comply with the regulations and the review of how the payroll system is structured. The costs and complexity of that are significant.”
Myth-buster: auto-enrolment fact and fiction
- Opt-out rates have not been as high as predicted. Many organisations are seeing take-up rates of 90% or even 95%.
- Levelling down does not seem to have happened, but many employers are offering more basic schemes for those entering through auto-enrolment.
- Fears around preparing administration and payroll systems for autoenrolment have been borne out, with many providers reporting capacity issues.
- Many employers have underestimated what is involved. Lorica suggests those about to embark on a strategy should multiply the time and resource they think they will need to put in by 10.
- Concerns over whether some of the larger, legacy pension arrangements would be deemed as qualifying schemes have, for the most part, proved unfounded.
Case study: Fluidata
With an average age of just 29, pensions had never been high on the agenda for employees of telecoms provider Fluidata.
But with auto-enrolment on the horizon and increasing media coverage about the looming pensions crisis, the organisation decided to auto-enrol four years before its 2016 staging date and go straight to an 8% employee contribution level, with 6% coming from the employer.
Nigel Sanders, finance director, says: “We didn’t see why we should do it all at the last minute when we could offer it as a benefit to our employees now.”
The move also dovetailed with a wider shift towards encouraging a performance-based pay structure and promoting other benefits, such as subsided gym membership and private health insurance. “Our policy is that we will invest in and develop our staff, and the pension fits in with that,” says Sanders.
Fluidata decided to go with the government’s National Employment Savings Trust (Nest) scheme, largely because of its low fees. It ran sessions outlining the importance of staff saving for their retirement from a young age, Sanders adds.
The organisation saw a take-up rate of 94%. Sanders believes the business is also seeing a return in other areas.
“Our performance appraisals show a marked increase in people hitting their objectives,” he explains. “It’s actually a very small cost compared to what we get out of it.”
Case study: L’Oreal
For international beauty products firm L’Oréal, auto-enrolment has been an opportunity to re-evaluate its wider reward and benefits proposition.
Working with Buck Consultants, it identified four areas of reward: pay and bonus, savings and investment, more generic benefits such as private medical insurance or life assurance, and healthy living, says Ben Marks, HR compensation and benefits director. These will be tied together in a flexible benefits platform it will launch shortly after its auto-enrolment staging date on 1 August.
“We believe it’s a good thing people save for their pension, but part of our reward strategy is to attract, retain and motivate, so our benefits have to be appealing and relevant,” says Marks.
On the savings side, L’Oréal is looking to complement its pensions offerings with other products, including a corporate individual savings account (Isa) and an employee share scheme.
Marks admits that looking at the wider reward picture while trying to roll out auto-enrolment is ambitious, but one advantage is to ensure that those who are already in an existing scheme remain engaged, even while the main focus is on auto-enrolment.
“The key is to segment our staff so we can say ‘autoenrolment doesn’t affect you, but engage with us on flex’,” he says.
Viewpoint: Professor Stephen J. Perkins
Since October 2012, employers have been required to enrol certain workers into a pension plan and to make an employer’s contribution to it. The legislation is being phased in, starting with large organisations and applying to small employers over the next few years.
From the evidence my team collected for the Chartered Institute of Personnel and Development (CIPD) Annual reward survey, published in May 2013, employers are highly exercised by auto-enrolment.
The respondent sample, which covers large to small organisations in both the for-profit and not-for-profit (including state) sectors suggests that many HR professionals feel caught between the regulations and employee resentment towards auto-enrolment. Some mention problems in both communicating with staff about the changes and in getting the attention of senior management.
Rather than regarding auto-enrolment as a compliance burden, smart employers will look at turning it to their advantage.
The Pensions Regulator encourages employers to ‘know their workforce’, their staging date, and to have a plan of action. For example, employers need to ensure their auto-enrolment system is adapted to reflect changes to earnings thresholds; new rates effective 6 April 2013.
The survey results indicate aspirations to rebalance the reward mix. Proactive communication, including the better use of total reward statements, could help. Education is needed on the benefit of deferred income in employers’ pension contributions and access to a scheme that administers it.
Better knowledge of the overall reward package can be viewed by employees as empowering and, given the prospect of mobility between employers during ever-lengthening career trajectories, controlling their portable pension pot is something staff have a major stake in.
– Professor Stephen J. Perkins is dean of the Business School, London Metropolitan University