Small but fatal?

The delay to the auto-enrolment timetable for smaller companies could put the success of the entire project at risk. John Lappin investigates

The Liberal Democrat pension minister Steve Webb is adamant this will not happen. Speaking at an NAPF trustee conference in early December, he said: “The change of moving employers with fewer than 50 employees until the next parliament was fairly incremental. The crucial point is around 5 million people will have been auto-enrolled by the next election. The cultural shift will be there at that point and I think the momentum of the reforms will be unstoppable.”

However, before the announcement Webb had been vocal in his statements that there would be no delay.

Certainly, the delay is likely to be widely felt within the working population. The Department for Business, Innovation and Skills suggest there are 1,141,950 businesses employing fewer than 50 people totalling around 6,503,000.

Lane, Clark and Peacock principal Andrew Cheseldine says: “Although only about 50 per cent of the UK working population are active members of pension schemes, for smaller employers this proportion is much lower – 12 per cent for employers with fewer than 13 employees and 28 per cent for those with fewer than 100. It follows that there may be about 5 million of these workers who will be affected by the deferral.”

That is, of course, before you consider that it will take longer for the total contribution level to reach the 8 per cent maximum, a level not viewed as adequate by the pensions industry anyway.

The issue of lost contributions is one that will impact providers who have quoted charges on schemes based on their understanding of what the roll-out and contribution increases were supposed to be.

Although, he notes that some employers will find out in January that the delay is only a matter of a month, Adrian Boulding, pensions strategy director at Legal & General, says: “The saddest implication is the loss of pension contributions. Allowing for small firms, which will be put back to the next Parliament, but also the big firms that will see the 2 and 3 per cent increases put back as well, on my calculation, we will lose 5bn of pension contributions that were going to go into the pots of people that need to save for retirement. They are never going to get that back. That is our frustration.”

Some in the industry, such as Jelf head of benefits strategy Steve Herbert, believe there was a case for the whole reform to have been put back rather than distinguishing between different classes of pension saver by employer size. Indeed he thinks such a move should have been considered back when Lehman Brothers collapsed, making it obvious we were in for a difficult decade.

But as the roll-out is going ahead at a slower pace, Herbert predicts bad press stories from people on reduced contributions receiving very little from their pensions. In the event that those enrolled in October 2012 remain on a 1 per cent employer and 1 per cent employee contribution until 2016 or 2017, someone on 15,000 a year retiring after five years could find their pension worth less than a pound a week. Hargreaves Lansdown head of pensions research Tom McPhail believes the delay creates more problems than it solves. He says: “It was premature in 2011 to announce the delay because we don’t know how their margins will be squeezed. It was premature and unnecessary and undermines confidence in the auto-enrolment project. Having set the timetable they should have stuck to it. It raises questions about the review date in 2017. We won’t be in a steady state. Will we be able to take a view on allowing transfers in and out? Should Nest should be used for short service refunds? How will we deal with small pots? Do we have a central fund for those? Do they follow people? We have lots of unanswered questions.”

Chris Atkin, managing director of Atkin & Co, says: “It is bad news for the employees of small companies but good news for the people who run small companies. We are finding smaller companies aren’t taking a great deal of action. They can sit and watch and see how it goes. If it is a total disaster, they may not have to do anything. Initially people will have very small accounts, and one wonders what the popularity will be after four years.”

Boulding, however, is hopeful that taking the heat out of the issue for the small business lobby may help the reform get off the ground.

“Perversely it might help us. Small employers have been most vocal about the reform. With a bit of luck they will go away for a bit now and we can get auto-enrolment going for the large and medium employers without that derogatory noise going on in the background. That might help us persuade everyone else that saving for a pension is a good idea and we can help you do it, with help from the tax and the employer.”

Others are worried about a permanent divide and say that depends a lot on the power relations in Westminster. They also suggest that the decision to delay was very unlikely to have been the decision of the pension minister. Ian Neale, director of Aries Pensions says he is hugely disappointed.

He says: “I think it is a political decision, a sop in particular to the Institute of Directors, who have been lobbying fiercely for an exception altogether. My personal view is that the auto-enrolment regime is an essential minimum but arguably too little too late. The government says it is committed, but they have put the actual date back into the next Parliament, the political equivalent of the long grass.”

The Pensions Management Institute’s technical consultant Tim Middleton says: “We have to recognise the possibility that the Tories may get a majority at the next election, meaning Steve Webb would be shunted back on to the backbenches. If they were then to take the view they didn’t want to implement it, they could go back on the original plan. We could be reading too much into it of course.”

I don’t doubt for a minute that the pension minister wants autoenrolment to hold, but we need a statement from the government

Richard Butcher, Managing Director of Pitmans Trustees draws parallels with ’Yes, Minister’ recalling how in the sit com Sir Humphrey Appleton could unnerve Minister Jim Hacker by suggesting a decision was ’brave’. He says: “We have an unusual situation because our pensions minister can afford to be brave because he is a Liberal Democrat. It is pretty unlikely he will be in the next government so he can do more in the next two and half years. The next pension minister could be someone who is trying to climb the greasy poll. They are less likely to be brave. They are less likely to close this loophole. The staging dates could be cancelled. The commercial world has a stronger say with politicians than individuals.”

However one of the strongest critics of the decision has been Baroness Jeannie Drake, one of the members of the original Pension Commission, which set the ball rolling on auto-enrolment and what was to become Nest in the first place.

She says the biggest problem with the delay is that it removes one leg of the three legs of the reform.

“We recommended three things that had to hold for the long term – people had to work longer in view of extending life expectancy which meant the state pension had to rise and that the state pension age should be flat rate and be more generous to provide a firm foundation for saving, and in a sense that is progressing. The third leg was there would be no earnings related savings in the state system, but that the decline of employer engagement would be reversed by having compulsory employer contributions plus the tax relief. Those three legs are inseparable in order to have a fair deal from the system and to have a sustainable pension in the long term. The delay is unfair on all citizens, and more unfair to those in small companies.”

She suggests the government has been looking at things through the wrong telescope casting it as an issue of regulation for small business. If it really was such a burden then other ways should have been looked at to help small firms out such as with tax relief. But fundamentally Drake wants to see a statement from government about their intentions.

She adds: “I don’t doubt for a minute that the pension minister wants auto-enrolment to hold, but we need a statement from the government.” She believes that eventually the government will have to confront the issue, but the dithering risks leaving more people on means-tested benefits in retirement.

McPhail says that ultimately the pension industry may need to lobby to stop a delay becoming permanent. That will involve talking to the select committees but also talking to the Treasury and not just the DWP. McPhail thinks it could even involve trying to convince the employers’ organisations that it is in no one’s interests to leave lots of people ’unpensioned’.

Middleton is worried about the implications for Nest and says it must have an impact on its business model. He says: “The fact it is going to be beyond the end of this Parliament is ominous. It does undermine the business model of Nest, designed for smaller employers. That part of the market isn’t going to be available for them.”

However Nest chief executive Tim Jones is aiming to allay those concerns. He says: “Nest members have access to high quality pension provision at a low charge. In the longer term, our charges may fall to a 0.3 per cent AMC. Currently, this AMC plus the contribution charge of 1.8 per cent delivers a charge level at broadly equivalent to 0.5 per cent AMC for most members over their time saving in NEST – a significantly lower charge than they have been able to access historically.

“There are a number of variables that determine NEST’s costs and revenues, including the broad range of member volumes estimates, so it’s hard to isolate the effects of individual factors. Clearly, the timing changes taken alone are likely to add to the time it takes Nest to repay the loan, but, Nest’s business model is robust even in pessimistic scenarios. Nest is for use by all sizes of employers, from large to small, the impact of the changes to the staging timetable is, of course, to alter the timing of membership of workers from smaller firms into all qualifying pension schemes, but it does not change the eventual numbers expected to start saving for their retirement under automatic enrolment.’

Looking at advising employees on the ground, Master Adviser’s Roy McLouglin says he is in two minds, split between what smaller employers of between five and 50 people are telling him and the fact that the reform overall is very necessary.

He says: “Small businesses feel they don’t have enough information and they see it as a stealth tax. Lots of business people are worrying about next year. Although most of them wouldn’t have been hit until 2013, 2014, some were saying this is the difference between staying afloat or not. Some of them are close to edge, so maybe the delay has been a good thing. Conversely, I talk to lots of people in their 20s and that haven’t got pensions. With stakeholder failing, it should still come in and not be abandoned. That would be foolhardy. If it has to be done through the employer, then it has to be. I do not think it should be totally scrapped but for a ’from the ground view’, there are business who say might be crippled by the three percent. The practicality of pushing this back is sad, but was probably the right thing to do.”

Defaqto insight analyst for wealth management Andy Leggett says he believes that only by using auto-enrolment can savers be reached and its research backs this up.

He says: “What impresses me was that 21 per cent said that they would encouraged to save if they were automatically paying into a company pension. Pensions is the classic example where people don’t get round to it. If a fifth of people consciously realised, the actual number must be higher than that.”

As we stand, auto-enrolment is set to go ahead. The revised timetable will soon be published, giving new staging dates for smaller companies. But the consensus view is the chances of all of those staging dates ever being enforced has been reduced as a result of this delay.