It’s nearly five years since the first employers stepped up to the automatic enrolment challenge. Many company executives could be forgiven for thinking that, once compliant, the AE box is now ticked. However, with the outcome of the government’s AE review expected later this year and phased increases in contributions looming on horizon, Patrick Heath-Lay, Chief Executive Officer of B&CE, provider of The People’s Pension, outlines the top 5 considerations that bosses should have on their radar.
Nearly 8 million people are now saving into a workplace pension through automatic enrolment (AE), according to figures released in June by Department for Work and Pensions (DWP). Many of them are saving into a pension for the first time. Opt-outs are lower than expected, and employer compliance levels are high. This is all good news for employers, members and the wider pensions industry.
However, while it may be tempting to consider AE as “job done”, further changes are coming. Chief amongst these is “phasing” – the introduction in April 2018 of phased increases in both employers’ and members’ pension contributions.
Under standard AE rules, each contributes a minimum of 1% of the employee’s basic salary into an AE pension scheme. From April 2018, this will rise to a minimum 2% for employers and 3% for individual employees and again from April 2019 to a minimum 3% employer contribution and 5% for employees.
1) Need to plan for cost increases
These changes will represent a structural increase in firms’ cost base and executives are having to factor this into their financial forecasting. Phasing also means potential administrative considerations as companies ensure their payroll systems are set up to reflect the increased contributions. Employers will also need to determine how to communicate with their employees about these changes to aid understanding and the importance of continuing to save for retirement.
2) Need to plan for potential opt-outs
The risk of an uptick in people opting out of AE altogether as a result of phasing is very real. There are a variety of reasons for this, not least more immediate financial pressures on individual workers’ salaries that push pensions to the back of the queue.
This is a key concern for employers, the pension industry and government because of the obvious knock-on effect to retirement provision. With firms also landed with the potential administrative head-ache of managing opt-outs and potential re-enrolments in the future, how best to minimise opt-outs becomes an important consideration.
3) Widening of auto-enrolment to take in previously excluded workers
At the end of 2016, the government announced a review of AE to consider its success to date and how it could be further developed to encourage as many people as possible to save into a workplace pension. The results of this review are due later this year and with them is likely to come further clarification on issues such as how the AE net can be widened to include previously-excluded groups such as the self-employed and lower paid workers.
Employers with large numbers of workers earning less than £10k per annum, who are currently outside the scope of AE, may need to factor in what a change in this policy could mean for them. For many firms, this may actually be good news – the overall cost impact is likely to be minimal and the administrative burden of differentiating which employees members are in or out of their AE scheme is eased.
4) What happens post-phasing?
Of course, the big unknown is what happens in 2019 and beyond, once this round of phasing is complete. There is general agreement that contributions at 8% of salary are unlikely to be enough for a worker to secure their financial future. So, the next challenge is how to encourage employees to contribute more. Whilst there is yet to be clear direction from policy makers on how they expect this to happen, employers would be well advised to keep a close eye on this issue.
5) Is there an opportunity for employers to make their workplace pension a differentiator that helps talent recruitment and retention?
For many employers, promoting their workplace scheme to employees and communicating its benefits is not only leading to fewer opt-outs but also helps position them as an ‘employer of choice’.
Don’t get me wrong, the lack of member engagement remains a thorny issue for the whole pensions industry. Engagement is hampered by a lack of pensions understanding, multiple – possibly forgotten – pension pots, lack of access to cost-effective, trusted advice and a limited visibility of their savings.
An initiative is underway, backed by The Treasury, to launch a pensions’ dashboard in 2019. This online tool allows members to see all their retirement savings in one place and will undoubtedly help to give members much-needed visibility.
However, many employees will need more support in their planning and herein lies an opportunity for employers. We are seeing encouraging signs that many businesses see AE as an employee engagement tool, rather than just a compliance cost, and are investing accordingly in their scheme – for example by offering contributions beyond the minimum and in office-based promotional activities.
There is an opportunity for employers to take this further by considering offering access to worksite advice, for example. In so doing, they have an opportunity to differentiate themselves as an employer who genuinely supports their workers’ retirement savings journey.
While admittedly some uncertainty remains about aspects such as contribution levels post-2019 and the widening of AE to excluded groups, there is much that companies can do to plan ahead. By determining potential cost increases and how a workplace pension can add to the attractiveness of their overall benefits package, employers can make sure they are well positioned to adapt quickly to the challenges and opportunities that lie ahead.
For more information on how The People’s Pension can help, please visit us at thepeoplespension.co.uk