Martin Thompson: Gearing up for a new era

A message from the sponsor of the Employee Benefits/Premier Pensions and Workpalce Savings Research 2012:

This year will be remembered for many things, not least the London 2012 Olympics and Paralympic Games. But for the benefits industry, it will be remembered for the start of auto-enrolment.

Many employers have for years offered valuable retirement benefits for their staff, but it is clear from take-up rates that many staff are simply disengaged or perhaps just disillusioned with pensions.

In the 1980s, many staff automatically entered pension schemes when they began work. Back then, we didn’t really notice contributions deducted from our pay and now we are relieved to have 20-plus years’ worth of pension savings behind us. Future generations will doubtless feel the same.

So how prepared are employers for auto-enrolment? This year’s pensions and workplace savings research is encouraging, with some 72% of employers having project plans in place and a similar number having planned their budgets.

Worryingly, about 35% of organisations are not confident their HR/payroll systems will be able to cope. Our experience with companies that must comply with the new regulations next year is that payroll providers are far from ready, and even those that have started work are unlikely to be able to provide an all-encompassing solution.
From the government’s perspective, it is no doubt worrying that only 11% of employers surveyed are planning to use the national employment savings trust (Nest) for auto-enrolment, in light of the huge investment it has made in the scheme.

Similarly, just 10% of employers plan to use alternative ‘super trust’ arrangements such as The People’s Pension and Now:Pensions. Most appear to be planning to use their existing pension scheme.

Encouragingly, only 16% of employers plan to fix their pension contributions at the minimum levels required. But it is surprising only 39% plan to use salary sacrifice for auto-enrolled staff, which would result in savings for both employers and employees. This is due to HM Revenue and Customs granting pension contributions the same tax status as childcare vouchers and confirming that arrangements can be unravelled if staff opt out of their scheme. We expect more salary sacrifice arrangements in future.

It is good to see two-thirds of employers have governance processes in place to oversee their default investment strategy, but it is worrying that in most schemes most members remain within the default option without any thought to its suitability or their investment risk. After contributions, investment performance has the biggest impact on retirement income, so fund selection is critical.

The most common default option is a managed fund with lifestyling, but the performance of many of these funds is, at best, mediocre. Few schemes use multi-asset or diversified growth funds, which are increasingly being adopted by the largest schemes to optimise fund performance.

Finally, much has been made of corporate wraps and platforms, but the survey shows these are still in their infancy, no doubt because so many employers are focusing on auto-enrolment rather than broadening the range of benefits they offer.

Martin Thompson, a director at Premier