If the Government's spin about it is to be believed, employees will not only get their cake, they'll be able to eat it as well, with the legislation guaranteeing 8% contribution by 2016 (employees 3%, employers 4%, with 1% as tax relief.) But while stories of employers still not knowing about the scheme persist, one far less appetising aspect has received little attention - the very serious point that, for a lot of people, the slice they receive from their pension cake could be getting dramatically smaller.
The problem is that auto-enrolment is predicted to encourage seven million more employees to join a company pensions arrangement. It means firms that have hitherto given quite generous contributions to a low base of company pension-enrolled employees will suddenly find their costs for funding greater numbers soar dramatically. The only solution, predict some, is for firms to cut the contributions they have given to the few in order to pay for the many. Anarchy threatens to break out, especially as some believe auto-enrolment will prove far more popular than predicted. Andrew Cheseldine, senior consultant at Hewitt Associates, says: "A client in the financial services sector with 10,000 employees, 40% of whom work part time, decided to launch auto-enrolment early, in December last year. It found 80% of staff immediately moved into the pension scheme. Of these, more than half said they had previously been offered a pension scheme and turned it down."
At the start of 2010, the Liberal Democrats (when in opposition) warned 42,000 businesses would be forced to reduce the contributions they pay existing staff, labelling Government assurances that pension reforms will be good for employees as 'fanciful'. Since there is no actual compulsion for employers to pay their 3% side of the bargain until 2016 (it is just 1% in 2012, rising to 2% in 2015 and 3% in 2016), there are fears this 1% could be the default amount for everyone. "A lot of employers probably feel they can do without auto-enrolment right now," argues Darren Laverty, director, pensions advisory firm Secondsight. "They will have to implement it and contribute at least 3% of employees' salaries into NEST schemes by 2016. Many will have to do this in the midst of or in the wake of pay freezes."
Organisations that have waded into the debate include the Association of British Insurers (ABI). Maggie Craig, the ABI's director of life and savings, has described it as a "botched implementation of the Pensions Act that will put the success of the reforms at risk", adding "the four-year delay before contributions rise to 3% is unacceptable."
There is already a precedent for organisations lowering their contributions. Aon famously cut its pension contributions from 8% to 6% last year to save money, A 30-year old currently earning £30,000 a year in a scheme with these levels of contributions could expect to have a pension pot worth £654,000 at age 65. But if a cash-strapped, auto enrolment-affected company was forced to halve its contributions to 3%, the pension pot at 65 would be cut to £476,000. To make up the lost 3%, each employee would have to contribute an extra £75 a month, or £60 a month after tax relief.
Fears that companies will, in the future, fail to match their employees' contributions are not unfounded. In America, auto-enrolment is not compulsory, but when Hewitt Associates surveyed 150 midto large-sized employers in 2009 about their attitudes to it, more than half (55%) cited the increased cost of the employer match as the primary reason why they did not plan to offer it, which is up nearly 10 percentage points from 2008.
The rules state only the largest employers will have to auto-enrol staff from October 2012 and there is a sliding scale, depending on the size of the organisation, for when auto-enrolment comes into effect for other businesses. (see table). A major worry, though, is that firms will deliberately under-promote the benefit of auto-enrolment as a way of inducing staff to opt out.
"I think there will be loads of inducements (to opt out)," claims Laverty. "Small businesses will tell staff to take money over pensions. I can't imagine this won't happen. In a big company, though, you have to be compliant. But I think there will be a number of people who will learn how to be 'opt-out experts'."
Clive Pugh, partner in the pensions team at law firm Burges Salmon, adds: "Inducements can be as simple as a piece of paper stuck on the wall of the canteen saying, 'If you don't want to do this pension, here is an email address to contact'." He adds: "I don't think the Government understands how tough some employers can be. I heard of one that told staff 'leave the final-salary pension or you will be fired': 40% of staff opted out that day."
All firms will be hit with meeting the costs of auto-enrolment, but charities, in particular, are predicted to really feel the pain. A survey by the Association of Chief Executives of Voluntary Organisations (ACEVO) and Foster Denovo found 63% of charities had not considered the financial impact of the new legislation, while 66% had not decided on the strategy they would adopt to prepare for the changes. As it is, only 82% of charities offer a pension scheme to employees, which is down from 90% only last year. Typical take-up rates for pensions by staff working in charities is 20%-40%, meaning any high auto-enrolment take-up will severely increase their costs.
Experts agree all organisations need to find ways to reduce the costs associated with auto-enrolment, and soon. One method is by salary sacrifice. Because an employee would give up their salary equivalent to their pension contribution and the employer would pay that contribution on their behalf, salary sacrifice could bring the cost of contributions, for the employer, down by as much as 22%. Another way of reducing the impact of the 3% contributions is to save for them over the next three years. Companies could save 1% per employee each year, and offer this as part of or instead of a pay rise. Employers could, for instance, offer each staff member a pay rise of 2%, but put 1% towards their pension contribution.
Options such as these will be much better than the strict penalties imposed on employers that refuse to comply with auto-enrolment. These range from daily fines of up to £10,000 per day to a two-year jail term. "Inducements (for people to opt out) is just not on," says Cheseldine. "Do HR directors really want to go to prison over this? There have been tribunal cases over less. You need to be totally confident that staff who leave the business will be happy and won't say anything."
But Steve Folkard, head of pensions and savings policy at AXA Life, explains that in the war to recruit and retain the best talent, pensions should still be a major part of the HR armoury - rather than something employers have to do because of new legislation. He says: "The Government is still in consultation to devise a method that will put minimum pressure on employers, but this has yet to be refined. Employers with good pension schemes need to remember to tell staff how valuable the scheme is. Although some will absorb NEST quite comfortably, others will be forced to reduce other forms of benefits and cut pensions contributions by levelling down to 3%."
Levelling down is nothing new, as employers have been saving money on pensions by closing their defined-benefit (DB) schemes and implementing defined-contribution (DC) or stakeholder schemes for years. But this can be avoided, according to Cheseldine. "Employers have the option of auto-enrolling staff into schemes such as NEST for the first two years of their employment," he says. "Then after this time they could be moved into a company scheme with higher employer contributions. According to CIPD research I have seen, 75% of employees leave after two years, so employers could save money this way, while incentivising staff to stay on longer."
Staff have to be auto-enrolled into a qualifying workplace pension (with at least the same contribution levels as NEST) from day one of their employment, unless the employer offers a 'quality qualifying workforce pension scheme' that will allow the employer 90 days to auto-enrol staff. The National Association of Pension Funds (NAPF) has outlined what it takes to receive its 'quality mark' (see box), but to date only 60 employers have successfully achieved the status.
Another option for employers to consider is changing their benefits platform to accommodate NEST. Jonathan Watts-Lay, director at Wealth at Work, explains: "NEST is giving larger employers the opportunity to review their whole reward offering, and restructuring benefits could be the most cost-effective way forward. Employers often allow staff 15% of salary with which to purchase benefits," he says. "They could put their pension scheme onto a flexible benefits platform, give staff 15% and then employees could choose how much to invest," he says. "They could, for example, put 3% in their pension at the start of their career, perhaps putting the rest into private medical insurance or an ISA. They can then increase it at different stages of their lives."
The options for employers still depend on the Government's decisions. According to Folkard, rumours are circulating that NEST could be scrapped altogether with the legislation coming into effect requiring employers simply to auto-enrol employees into some form of pension - but the experts agree the lack of a firm legislative decision is no longer an excuse for employers to procrastinate over the inevitable: auto-enrolment will happen whether you like it or not.
START DATE BY COMPANY SIZE
120,000 or more October 2012
50,000-119,999 November 2012
30,000-49,999 January 2013
20,000-29,999 February 2013
10,000-19,999 March 2013
6,000-9,999 April 2013
4,100-5,999 May 2013
4,000-4,099 June 2013
3,000-3,999 July 2013
2,000-2,999 August 2013
1,250-1,999 September 2013
800-1,249 October 2013
500-799 November 2013
350-499 January 2014
250-349 February 2014
240-249 April 2014
150-239 May 2014
90-149 June 2014
50-89 July 2014
EVOLUTION OF NEST AND AUTO-ENROLMENT
2002: An independent review, led by Lord Turner, sets out to make recommendations for change in the UK pensions system
May 2006: White Paper proposes auto-enrolment and a personal accounts scheme
November 2006: The concept of personal accounts is documented in the Pension Commission's second report
November 2007: The Pensions Act (2007) heralds the launch of the Personal Accounts Delivery Authority (PADA), which is designed to implement personal accounts based on the legislation coming from Department for Work and Pensions (DWP)
26 November 2008: The Pensions Act is passed and becomes law
February 2009: DWP research shows 95% of people who save in a NEST account can expect an increase in pension income greater than the cost of their contributions
18 October 2009: Research from YouGov finds 6% of employers understand what personal accounts are, 36% have no idea how to introduce them
19 October 2009: PADA chairman says personal accounts will be a "beautiful, wonderful product" not "a default option for low earners". The scheme is to be launched in 2011 to give employers time to prepare
October 2009: The Department of Work and Pensions confirms a major publicity campaign will start in January to inform employers of their obligations
January 2009: Personal accounts and PADA are rebranded to NEST and NEST Corporation respectively. No 'major publicity campaign' has taken place to date
HOW TO ACHIEVE A 'QUALITY MARK'
- The employer has to provide 'engaging information' to staff
- Staff should receive a total of at least 10% of their salary into their pension pot and at least 6% should come from the employer
- The employer must provide access to an independent financial adviser or a helpline for staff
- The employer must provide a retirement advice service.