October’s pensions revolution is within touching distance but how ready is the industry? John Lappin investigates
With just a few months to the start of the great pensions revolution, there is no simple answer to the question of whether the UK is ready for auto-enrolment.
Industry figures sound relatively confident that established clients will meet what is required of them, while all seem to agree that large employers are in good shape for October’s landmark first employer staging dates. But as the number of employers’ staging dates per month snowballs, will staffing levels be high enough, will untried software work and will suppliers be able to meet demand?
Legal & General pensions strategy director Adrian Boulding is at the positive end of the spectrum of views. He says: “We are on course to enroll 400,000 new savers which is hugely exciting. We have built the systems, tested the systems and trained the staff. We are ready and raring to go.”
Standard Life head of workplace strategy Jamie Jenkins says that some employers could theoretically begin the process as early as July if it fits with a flexible benefits window or a financial year-end.
Buck Consultants head of defined contribution and wealth Philip Smith says: “Most clients of employee benefit consultancies will be looked after because by their nature they are prepared to take advice and pay for it. We are seeing no evidence of our clients not wanting to comply. They know it involves budgetary and administrative challenges but they are using it as an opportunity to review their current scheme to make sure it is the right vehicle.”
But he warns employers not to underestimate the complexity of workforce management and managing staging dates and deferral periods.
When considering the broader picture, Boulding also tempers his enthusiasm. He says: “You get a mixed pattern when you talk to employers. Only when they have embarked on their programme do they appreciate how difficult some of the detailed work is going to be.
“Employers go through several stages. They feel they know it, but it is some way off yet. They then realise that the details are difficult. They go backwards, then they come up to readiness. It is okay as long as we can avoid this feeling of overconfidence when they have an initial high-level understanding about auto-enrolment before they get into the nitty-gritty of doing a workplace audit of the types of employees they have.
This can be quite an eye-opener. HR departments may learn they have people in the building that they didn’t know much about and now they need to know about them.”
While larger employers are searching for overlooked employees, it may be medium-sized employers who face the biggest compliance challenge. Recent surveys should certainly give policymakers some cause for concern.
A survey by Jelf Employee Benefits last month showed that just 31.1 per cent of employers say they are ready – just a very small improvement on 29.5 per cent last year. Awareness has improved though. Last year 31.4 per cent of employers were not aware of their company’s start date, but this has now fallen to 12.4 per cent.
But only 42.2 per cent of employers have taken concrete steps towards implementing auto-enrolment.
A Chartered Insurance Institute survey of 500 micro employers showed that 42 per cent have not yet thought about auto-enrolment, while another 23 per cent have yet to take action.
Jelf head of benefits strategy Steve Herbert says his experience on the ground confirms this picture. At a recent event in Reading involving 20 employers, he notes that none said they were ready.
“There is awareness but there is no activity. They are going to events and learning more but they are not actually doing anything,” says Herbert.
He expects no further compromise on the timetable, and for him that means a lot of employers will be heading to Nest.
“I think many employers will end up in Nest. Unless the employers get their requests in for scheme terms in the next 12 to 18 months, there won’t be enough the time for companies to come up with deals or indeed have the implementation structure put in place.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “The big companies have a degree of pensions experience and will be okay. As we go down the employer size range – those with a few hundred employees – their challenge is not around the scheme but compliance with the employer duties, identifying eligible employees, payroll mechanics, making sure the right people go in, and for those who opt out what you do with their money? Are you flagging them to re-enroll? If there is a weakness in the system it will manifest there. With smaller businesses it gets easier. A 10-man business can deal with it by hand.”
Smith says compliance may be getting a little easier for companies with reasonably steady workforce and pay levels because we know all the regulations. However he also warns that firms with seasonal variations at Christmas or in the summer must not to underestimate the task.
Fidelity business development director Dan Smith agrees that the time needed to comply may be getting shorter, but it depends on circumstances. “It may depend on how much investment there has been in making sure the plan is fit for purpose over the previous few years. If you have got a plan that is 10 years old and you have done nothing to it, I can see how you might have to do a ’drains up’ review. That might take a year. With a modern plan and a good provider and high take-up where employees are engaged, it could take a few months.”
But he also warns that although the expert within the company may appreciate what needs to be done, they may not get the budget for outside advice until the fiscal year for when the change is coming in.
They tell us anyone on the average wage or less won’t be able to afford this. They say staff have faced pay freezes and real pay cuts, and the economic pips are absolutely squeaking. This is a concern because we are going to ask employees to do the bulk of the heavy lifting
80 Twenty Consultancy managing director Neil Welbury says one overlooked area may be the contribution basis. He says: “Originally it was on band earnings, but if you go for full pension earnings, it is 4 per cent not 3 per cent – a one-third increase in costs. That in itself is a big decision. Using band earnings means an individual calculation for every individual and there could all sorts of problems.”
However overall he believes his clients are in good shape.
It is not all about challenges. Some advisers say employers are asking how they can do more than the basic requirement.
Master Adviser senior partner Roy McLoughlin says: “Employers are saying to me ’tell me what we can do to make us look better than we need to, so we can go to employees and say here is what is obligatory, but we have gone the further mile’.” He says many employers are also arranging schemes now so that they do not shoulder the cost of advice post-2012.
Jenkins warns that some medium-sized employers may need to hire more staff. He says it is conceivable that for some, the administration cost may prove to be greater than the cost of potential new entrants.
Most experts from providers and advisers believe that the industry can handle the numbers. Fidelity’s Dan Smith says problems could arise if a lot of schemes attempted to transfer to one provider at the same time. But with that exception, he believes providers will be very busy but will cope.
However Jenkins sees potential problems down the line. He says: “We have a couple of hundred thousand DC pension schemes. We will have another million, some with two or three people. The real issue is not can the industry handle this volume, but around implementation. There are months in 2014 where there are tens of thousands of employers each month having to set up a scheme. For me, that is where the crunch comes.”
In terms of adviser numbers to handle this, Aegon regulatory strategy manager Kate Smith says: “Maybe the one positive of the delay to staging is the scale issue. The peaks of small employers are spread slightly. That should also help advisers spread themselves around.
Corporate advisers are also concerned that there has been little run-in time to test out some of the untried technology.
Welbury says he has been shocked to see how far behind the curve some providers and payroll firms have been as they are only rolling out systems now.
Will untried software work and will suppliers be able to meet demand?
Philip Smith adds: “Virtually none of the systems are live at the moment. Certainly very little of the middleware is built. Provider systems are demo versions, so it is a bit of a leap of faith.”
However, at least the advice market is adapting.
Jenkins adds: “Some benefit consultants will not only do fees but also some elements of consultancy charging, with more IFAs moving to consultancy charging. There might be some meeting of business models.”
Boulding says: “On the advisory front, we have seen advisers learning new skills. Previously core skills have been choosing a pension provider and benefits structure. Now they have had to lay on top of this checking through the workforce, and remuneration. We have seen advisers stepping up to the plate.”
Certainly advisers believe there is a huge opportunity once employers get a better understanding of the difficulties of the task.
McLoughlin says there could well be a shortage of advisers. He says: “Without exception every employer I have spoken to is saying ’we can’t do this by ourselves’. Once the chaos really hits, there is a massive opportunity in this space where the majority of companies in the UK are – the 5 to 50 person scheme. Luckily I’m in that space.”
Of course, small firms may also prove to be the most resistant to the reform. The views of Nigel May, a tax partner at MHA MacIntyre Hudson, may give a sobering foretaste of arguments to come.
“Many small employers are being sleep-walked into this arrangement. The way that this is being introduced is very smooth. It is almost Mandelsonian, with Nest starting with the largest employers. They are looking at something similar to 3 per cent National Insurance from a cost point of view. Six years you may view as a long time, but employers still reel under 13.8 per cent employers’ NI. To add this on top is odd.
Because of the phasing in it looks benign, but with the phasing from large to small employers and of contributions it has all the hallmarks of stealth taxation.”
The reality is that no one knows where cracks in the great October revolution might start to appear – but as with any project of this scale, preparation remains key.
What employer organisations think
The UK’s major employer organisations have differing views of auto-enrolment, though it is small to medium sized firms where all envisage the most significant problems.
Confederation of British Industry senior policy adviser Mario Lopez says that while it would have been better to get the regulations earlier, the largest employers have sufficient capacity in terms of legal and pension advice to navigate the reforms.
But he warns The Pensions Regulator it needs to be aware just how many people will be knocking on its door very soon. He wants flexibility for medium and smaller employers before TPR resorts to fining or even naming and shaming. Overall, he says the CBI supports the reform and has brought it members along with it, on the basis that a failure to reinvigorate a savings culture, coupled with the challenges of an aging population would otherwise mean higher taxes including higher business taxes longer term.
But he wants to ensure the reform is given time to bed in. He says: “In the current economic circumstances the take up rates may not be the same as those originally envisaged by the Pensions Commission. What we are keen to see is that people don’t panic and say this is not working because people are not signing up in the sort of numbers we thought. This is a long term scheme. We think this will work but it is not a silver bullet. It is a stepping stone.”
The Institute of Directors’ senior adviser pensions policy Malcolm Small says his members are now predicting a much higher level of opts out than a year ago, mainly because of the economic environment. He says two-thirds now expect 40 per cent staff to opt out.
He says: “They tell us anyone on the average wage or less won’t be able to afford this. They say staff have faced pay freezes and real pay cuts, and the economic pips are absolutely squeaking. This is a concern because we are going to ask employees to do the bulk of the heavy lifting.”
He adds that for smaller employers in particular the process looks arcane and some simply do not see it as their job to provide a pension so they will be resentful. However for those willing to engage, he believes enough help is available. Small also suggests that his research suggests that employers with a pension arrangement in place may go to their accountant for help with compliance but those without any arrangement may go to an IFA. Interestingly, he says having talked several company boards through the reform, when confronted with the details someone always asks if it wouldn’t be simpler to make it compulsory and suggests this may be what happens ultimately.
The Federation of Small Businesses remains the employer organisation most opposed to reforms. It wants all micro businesses – those with 10 employees or fewer – to be exempt. It continues to argue that the proposed changes are very complicated for small businesses to put in place, and that seven in 10 of its members say they do not have the expertise they need to choose a pension scheme for their staff.
The FSB has an alternative proposal which would allow all employees and the self-employed to save for a pension at a charge of 0.3 per cent or less collected nationally perhaps through PAYE, low cost funds and constant reviews on contributions.
FSB spokesman Pierre Williams says: “We know that small firms do not feel confident in choosing a pension scheme because it so complicated. We are thoroughly disappointed the pensions industry has yet to come up with an efficient system to cater for micro firms.”