Pensions auto-enrolment: Addressing the crisis

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• Employees may regard auto-enrolment as just another tax on pay

• Firms that introduce auto-enrolment early could increase the pension value

Auto-enrolment is meant to spur on some of the seven million British workers who were not saving enough for their retirement, but employers are long way from knowing if it will work

The government introduced the 2012 pensions reforms, which make it compulsory for employers to auto-enrol staff into a qualifying workplace pension scheme, as part of efforts to avert the pensions crisis by addressing the fact that around seven million people are not saving enough for their retirement.

Auto-enrolment will be introduced in phases over the next four years, with the largest organisations (120,000 plus staff) starting in October 2012 and the last tranche going in by September 2016. Under the regulations, employers will have to enrol eligible workers (anyone between 22 and the state pension age earning more than £7,475 per annum) into a qualifying occupational pension scheme or the national employment savings trust (Nest), to which employers will eventually contribute 3% and the member 4% (with a 1% tax break added in).

However, opinions as to whether these measures will solve the pension crisis are divided. The general consensus is that auto-enrolment is a positive step but not, ultimately, a panacea to get people to save enough for their retirement.

Jeremy Mindell, senior reward and tax manager at Henderson Global Investors, says: “Auto-enrolment is certainly a step in the right direction but, even at the top end, the minimum contributions are not going to be sufficient for most retirement expectations.”

Charles Cotton, public policy adviser, reward, at the Chartered Institute of Personnel and Development (CIPD), says that the costs of working longer and living longer have to be met somehow. “It is not a case of whether bosses should put an auto-enrolment scheme in place but whether they can afford not to.”

While the debate continues over to what extent auto-enrolment will solve the pensions crisis, employers will no doubt also be asking themselves whether or not it will diminish the value of the pension as an employee benefit. For example, some compensation and benefits professionals may be concerned that employees will view auto-enrolment as something their employer is doing because it has to rather than because it wants to.

Winners and losers

Neil McKie, head of reward at law firm Herbert Smith, believes that there will be winners and losers when auto-enrolment is introduced. “Those employers that already have a pension provision in place will fare well and [auto-enrolment] will give them a chance to benchmark themselves. But [employers] which do not have one set up could struggle.”

Paul Armitage, consultancy director, employee benefits solutions, at JLT Benefit Solutions, says that many employees may regard auto-enrolment as just another tax on their wages, especially if their employer is only making the minimum contribution.

Meanwhile, Paul Gilbody, director of market engagement at Nest Corporation, admits that many people still have a very limited knowledge about pensions and how they can be of benefit to them. However, he believes that once people learn more about how auto-enrolment works they will appreciate pensions as a benefit in kind. “When people understand what [a pension] will allow them to do when they retire and when they understand that it is a combination of their money, the employer’s contribution and tax relief, the value goes up,” he says.

Reduced value

But Kelly Bol, HR manager, reward, at disability charity Scope warns that if employers had to lower workforce contributions in order to comply with auto-enrolment and Nest, it could reduce the value of the pension as a benefit.

One of the main advantages of auto-enrolment is that is gives people, who would not previously have been able, the chance to save. But Spencer Roach, compensation and benefits manager EMEA, at manufacturing and technology firm Honeywell warns, engaging employees is another matter.

“We have had auto-enrolment at our company for 10 years but being a member of a plan does not necessarily mean you are engaged with that plan. Only a third of our staff are contributing more than the minimum, and we want to reach more.”

While Mindell believes that auto-enrolment into a workplace pension will be an effective retention tool in the years to come, he does not think it will necessarily aid recruitment. Immediate salary increases will probably be more attractive than long-term pension prospects: “A good pension package might keep people in their job for longer but it probably will not attract them to it. If you have got a job that is offering a 10% pension contribution up against one with a higher salary, people will usually go for salary.”

The government also unveiled plans in last month’s green paper to introduce a flat-rate pension which could be as much as £155 a week (up from £102.15 for a single man or woman) but said that it would take several years to introduce and would not apply to current pensioners.

When questioned about whether the introduction of a flat-rate would make a difference, employers and policy advisers seem divided. Gilbody says that it might make things more clear for employees. “The point is, you can clearly communicate to people with a flat-rate: ‘If you did nothing, this is what you would get. But if you make contributions it could be a lot more’.”

Bol, however, does not think a flat-rate would encourage low earners to contribute to a pension scheme. “I think it is a good thing but I do not think it will help Nest because low earners will see [the £155 a week] and think that will do me, that will be enough, so that will actually deter them from contributing.”

Herbert Smith’s McKie says that among his workforce the low weekly rate was too insignificant to make much of an impact: “The levels we are talking about will not give everyone comfort in their old age.”

So, ultimately, while the majority think that auto-enrolment is a good idea, it is not going to solve the pensions crisis. As Mindell from Henderson Global Investors puts it: “Anyone who thinks auto-enrolment is the final answer is deluding themselves.”

Read more from the roundtable discussion on pensions auto-enrolment