Making it pay to save

The DWP\'s announcement on auto-enrolment is welcome. The spotlight now moves to what thousands of new scheme members means for employers says John Greenwood

The pensions industry is breathing a huge sigh of relief after the Government confirmed the European Union does not see auto-enrolment as breaching the Distance Marketing Directive. The decision has also sounded the starting gun for advisers to step up their communications with employees about what responsibilities and extra costs they will face in 2012 and the solutions available to deal with them.

Ministers will now amend the Pensions Bill 2007 to allow automatic enrolment for contract-based schemes as well as trust-based, which are already included within the Bill. The amendment will pave the way for employers to automatically enrol the 4.7m employees not already in companies offering workplace pensions in 2012.

Pensions Reform Minister Mike O’Brien says: “Automatic enrolment is key to combating the inertia that prevents people from saving and I am pleased that millions of people who work for an employer who offers a workplace personal pension will be able to benefit from this important social reform.”

Tony Pugh, UK head of DC pension services at Mercer says it is a significant step in giving companies with these schemes the same rights as those providing trust-based arrangements. He says: “Organisations that are strategically reviewing their approach to defined contribution pensions should now be able to compare more objectively the merits of trust-based and contract-based arrangements. They can now have more confidence that neither will be regarded more favourably in the context of personal accounts.

“Those employers who already offer contract-based arrangements to their employees now have one less thing to worry about around the impact of personal accounts.”

Employers have been concerned about the impact of personal accounts on their existing pension arrangements as it was not clear what tests they would have to meet in order to use these as alternatives to personal accounts.

Figures produced by Aegon show GPP members could see five years of saving wiped off their pension in the event of a levelling down. For low to moderate earners, the pension income paid out after 25 years of saving into a personal account is roughly the same as the income paid after 20 years saving into a typical GPP.

Pugh says the fact that auto-enrolment will bring so many more people into companies’ DC arrangements means employers will start taking these plans more seriously. A survey by Mercer in 2007 found that around two-thirds of all occupational pension schemes set up after 2002 were contract-based. Yet Pugh says the majority of these were set up around five years ago in a hasty bid to escape DB liabilities. With auto-enrolment increasing the population of these schemes employers will start paying considerably more attention to their DC plans.

“Some employers have been paying little more than lip service to their DC plans. But with all these new members soon to be coming on board there are now no more excuses for not looking at the whole pensions piece,” says Pugh.

But Pugh adds that issues around means testing remain, and this issue will now take centre stage in the minds of many employers. His firm is actively looking at ways to offer alternatives to personal accounts for staff who want to opt out of pensions.

“We have been looking at this regardless of the personal accounts/ auto-enrolment agenda, as many employees have more pressing needs than pensions,” says Pugh. “But auto-enrolment will leave even more people wanting an alternative if they opt out of pensions. We are talking to employers about what we can offer these staff, for example in terms of a 3 per cent payment into a share plan or an accumulating savings account.”

Steve Bee, head of pensions strategy at Scottish Life, is predicting an advice drought as demand exceeds supply in the adviser market in 2012.

Bee says: “We should expect that something like two and a half million people could be covered by financial advice from advisers, assuming there are as many as 20,000 IFAs who are qualified to give advice on pensions. But there are 29m people in the UK workforce right now and as many as 10m of them are likely to be auto-enrolled into the personal accounts scheme with the protection of generic advice. That fact alone should surely set bells ringing among those putting together the factsheets and flowcharts that are presumably being drawn up following the Thoresen Review; that and the fact that financial advice on complex issues like pensions is such a scarce commodity that is probably already stretched as far as it can go.”

The Government may have attempted to kick the means testing issue into touch by launching a consultation on the issue, but now that the Distance Marketing Directive hurdle has been overcome, the question of whether it pays to save is set to take centre stage once more.