Fully Automatic

It may not feel like it, but we stand perched on the precipice of one of the biggest pension shake-ups in living memory. The advent of automatic enrolment is set to radically alter the UK retirement landscape, which makes the pervasive lack of knowledge of the reforms particularly troubling.

Starting from next year, employers will be obligated to automatically enrol employees in either a workplace pension scheme or the National Employment Savings Trust (NEST) and make contributions on their behalf. It’s a major change that is going to have big implications for just about anyone in business. A company need only employ one member of staff earning more than £7500 to fall under the new rules, leading to potential administrative headaches for small businesses. However, it is larger companies that need to start getting their houses in order with the greatest urgency.

The Process

The reforms are being phased in over the next four years, in a series of ‘staging dates’. While many small businesses will not have to be compliant until 2015 or 2016, larger companies face more pressing deadlines. The largest organisations, those employing upwards of 120,000 people, need to be ready by October next year. Even those with less than 100 employees must have systems in place by the first half of 2014.

“Workplace pensions law is changing and every employer will have to act,” said the Pension Regulator’s chief executive Bill Galvin in July. “Automatic enrolment will not affect the bulk of small businesses until 2015 or 16. We nevertheless urge all employers to take some time right now to look up their automatic enrolment duty date so that they know when the new law will apply to them - and make a note in the diary to take action in plenty of time. The regulator will also write to all UK employers at least twice in the lead up to their duty date.”

But even with these exhortations to action, the Pension Regulator’s own research into business preparedness makes for fairly grim reading. According to the regulator’s data, 67 percent of small businesses and more than one in 10 large employers remain completely unaware of the impending changes. Even among those who do know what’s coming, three quarters have yet to discuss their preparations while almost 50 percent are planning on leaving it to the last possible date before addressing the issue.

And it isn’t just the employers. Recent figures from the Chartered Institute of Professional Development (CIPD) show that employees are also clinging onto their blissful ignorance of the reforms. According to the CIPD’s latest Employee Outlook survey, just under half of private sector workers and just over two-fifths of voluntary sector workers remain unaware of the planned changes to the pension system

Considering that these reforms have been on the table since as far back as 2008, this apparent lack of concern is hard to understand. Whether this reluctance to engage comes from lack of knowledge or somewhat wishful thinking that the changes will not actually happen, business needs to wake up to the reality sooner rather than later. The regulator hasn’t been waving a big stick, but it has been direct that failure to comply be the new rules will have consequences. “Clearly the regulator will move to address wilful or persistent non-compliance,” Charles Counsell, interim executive director of employer compliance, told Money Marketing. “But we will take a graduated approach to enforcement action, making employers aware if they have not complied with the law and giving them a fair opportunity to comply before taking further action.”

The key driver behind the move towards auto-enrolment is the need to have more people saving for their retirement. Growing longevity means that the simple state pension can no longer be relied upon to provide for a comfortable retirement. By making signing up to a workplace pension a default consequence of having a job, it is intended that a culture of saving can be fostered. This is particularly true for younger workers, who have consistently demonstrated a major lack of interest in preparing for retirement.

In effect, the rules seek to take advantage of our inherent laziness, in the belief that opting out will be too much hassle for the majority of workers. However, new research from Legal & General suggests that as many as a third will choose to opt out of company schemes, choosing a larger pay packet now over security in retirement. This data is backed up by figures from the Association of Consulting Actuaries which suggests that as many as 40 percent of workers at smaller business will choose to opt out.

If a worker does opt out, then their employer is obligated to opt them back in after a certain amount of time has passed. Of course, the employee is then free to opt out again should they so wish, starting the whole process again and potentially creating an endless feedback-loop.

What’s the cost?

Perhaps one of the reasons that companies seem unwilling to engage with the reform process is its inevitable expense. Quite aside from the administrative burdens that accompany the setting up of a company-wide pension scheme, employers will now have to contribute to the retirement of all eligible workers. Times are tough enough as things are. The argument that it’s all for the common good may well be persuasive, but it doesn’t affect a company’s bottom line.

So it’s hardly surprising that one of the consequences of the reforms could well be smaller pensions for everyone. A recent survey by the Association of Consulting Actuaries found that one in four organisations plans to cut its workers’ pensions once the new rules come in. While just over a quarter of employers have budgeted for the increased costs of auto-enrolment, 27 percent say they plan to “review their existing pensions scheme benefits to mitigate the cost of higher scheme membership.”

“As things stand, there is a clear danger of more ‘levelling-down’ – a trend which our surveys have identified for some years now,” said ACA chairman Stuart Southall. “With contribution rates into many schemes failing to keep pace with the pension costs of longer life-spans, and with employers expecting, and in some cases relying upon high anticipated levels of pension opting-out for budgetary purposes to keep their auto-enrolment costs down, warning bells are ringing.”

The potential costs of the reforms, and the impacts they could have on workers already in workplace pension schemes means that understanding exactly what they mean couldn’t be more important. Unfortunately, the ACA report provides yet more evidence that many businesses haven’t grasped what the shift to automatic enrolment actually entails.

According to the ACA, at least two-thirds of employers that do not currently offer a pensions scheme say they are unlikely to auto-enrol employees in either NEST or and employer’s scheme, a statistic that should have those tasked with publicising these reforms slapping themselves with frustration.

The lack of awareness of the reforms, coupled with the lack of enthusiasm from those that do know they are coming, highlights the importance of better education. The Pension Regulator already provides a raft of information on its website for both employers and employees. For businesses, these include interactive tools outlining the exact requirements employers face under the new legislation, how to auto-enrol employees and how to calculate the minimum employer contribution. Workers can find plenty of documents clearly outlining their employers’ responsibilities. The regulator is also readying a £10 million advertising campaign to raise awareness of the obligations faced by employers under the act.

In the meantime, it is falling to private business to try and get the word out. In October, Lansdown Place will launch a series of seminars designed to properly explain the changes to the pension system. The first of these events will feature ‘pension guru’ and cartoonist Steve Bee, whose work can be viewed within these very pages, as keynote speaker.

The next move

What all the above shows is that there is quite a way to go before UK business can consider itself ready for pension reform. On the one hand it’s understandable. Give someone a deadline five or six years in the future and they are unlikely to fall over themselves to hit it right away. Here in 2011, 2016 seems a long way off. But that ultimate cut off date seems to be obscuring the reality that many larger employers will need to be compliant much sooner. Setting out budgets and long-term strategy requires serious planning. As it currently stands, it seems many companies are unaware even of what the changes will mean to them, making preparing for the future an outright impossibility. Whether this is the fault of the regulator’s poor or the business community’s unwillingness to listen is increasingly moot. These reforms are on their way. If business isn’t ready for them, it may find itself paying the price.