The biggest change in pensions for a generation is barely seven months away. John Lappin checks just how ready the industry actually is
Auto-enrolment is almost within touching distance, with the United Kingdom’s ten biggest employers introducing the system from the start of October, quickly followed by other large and medium-sized firms throughout 2013 and into 2014.
The pension bill became an act last year and in the last few weeks both the Department for Work and Pensions and the Pension Regulator have been busy updating much of their guidance.
But while some advisers and pension experts are now very positive about their readiness for the big day, others remain frustrated that details are still being ironed out around some key issues and even question just how simple the system is, despite what ministers may assert to the contrary.
Some advisers have worries about infrastructure and capacity in the pensions industry and even about who will provide the technology and staff expertise to link pension systems with payroll systems.
But the crucial actors in the soon to unfold drama remain the employers. All experts agree that very few employers believe auto-enrolment still won’t happen, but their state of readiness varies dramatically, not just within peer groups but between them too. Some corporate advisers describe examples of medium-sized firms that are far ahead of larger companies despite the fact that their staging dates are significantly further away.
However, amid these concerns, some are definitely in the optimists’ camp. John Wilson, head of technical services at JLT Benefit Solutions, says: “In terms of legislation, the picture is all but complete. We have the Pensions Act and things like the final regulations on certification were very important. A lot of employers will need that. We also now know the proposed thresholds and the band of earnings.”
Legal & General’s pensions strategy director Adrian Boulding says: “The state of readiness is better than the Olympic stadium. Over in Stratford they have got the concrete in, but need to put in vital infrastructure like the loos. On auto-enrolment, we have got most of the important parts, such as when you have to start. You know pretty certainly what you have to pay, although not the exact points of the threshold. We know almost all of the information about which members you have to bring in.”
Others are less happy and suggest that even recent clarifications remain very difficult to understand.
“Some of the providers that have better solutions have people queuing up to join but there are only a limited number of them”
Jelf head of benefits strategy Steve Herbert admits that he has read one document concerning scheme accreditation three times and still doesn’t understand it.
“We need clarification on the certification process. For me, the document that came out a few weeks ago, is a million miles away from where certification was meant to be, which was you certify your employees, if you do this, this and this. It was a lot more complicated than that. It has different categories of workers on the contribution bases, one being the Nest basis, and the legal minimum and the other being a scheme basis. We need to get that nailed down. The information is out there but it is not clear.”
Rudi Smith, senior consultant at Towers Watson says: “It is good there has been clarification. It has been in direct response to questions that have been raised by interested parties. But when you get clarification, it raises more questions. On the earnings thresholds, it will be useful to know how they are going to move. It has an impact on how many employees are going to be covered and also on the cost of contributions as well.”
Certainly some of these details appear to be pretty fundamental to the whole system.
Boulding accepts there are still challenges. He says: “What do we mean by basic pay? If you say I am going to do basic pay from pound one what do we mean?
“We know clothing allowances and car allowances are not included, but what of regional allowances? If you pay employees extra say in London or Edinburgh where the beer is more expensive than in Newcastle, do you have to include that? We await an answer.”
Smith lists other areas where a final decision has not been made or where the clarifications still leave ambiguity.
For example, for defined benefit schemes that plan to defer eligible jobholders, it isn’t clear when the transitional period ends, though the expectation is that it will coincide with the end of the phasing period for DC schemes.
He points out that we now have more information around flexible benefits and regulations surrounding inducements but once again, it is not entirely clear.
“The Pensions Regulator published more information about salary sacrifice. It looked at cash accounts and one area it singled out for consideration was allowing people to opt out with an inducement. It said there was a difference between someone in flex opting out and getting a different benefit or someone getting a cash alternative, but it didn’t go on to say “this is our view on the exact position” so it is a little bit open to interpretation.”
In the area of non-UK citizens working in the UK, TPR has issued examples where it thinks contributions will have to be made. But it has also said that in some instances this will have to be left to case law.
“We need clarification on the certification process. The document that came out a few weeks ago, is a million miles away from where certification was meant to be”
Even Boulding, who is generally optimistic, believes the foreign national issue remains a bit of an ’open sore’ and warns that for some firms with a very high percentage of foreign nationals in their employ, this is going to be a very significant issue.
While there are certainly some devils remaining in the detail, what impact has this and recent delays had on sentiment among employers?
Herbert says the lack of clarity means that some employers are starting to get restless. He says even some of the largest firms lack a detailed plan though they know they must do something. If anything, the impact has been greater on smaller employers.
“The SMEs are starting to get war weary because it has been delayed and things have been cancelled. They are starting to get a bit sick of the whole thing. Many are now saying we’ll leave it until we get quite close,” he says.
Matthew de Ferrars, a pension lawyer with Pinsent Masons says there may also be a lack of understanding among some employers of just how significantly the change is.
He says: “A lot of employers have group personal pensions in place but don’t have much in the way of an agreement with the provider. It was always a case that the agreement was between the employee and the provider and the employer was more of a facilitator. But now there are onerous obligations and for employers not meeting them, there are big consequences. I am not sure if that has filtered through. Some employers simply think they can expand their GPP out.”
In terms of the overall legal position, however, de Ferrars says he is hopeful that the TPR will show flexibility.
“There is a need to be pragmatic. The people who are really trying to avoid their duties are not the same as people with the best intentions who are trying to implement things, but where it doesn’t quite fit with payroll or admin systems, but broadly gets them there. I can’t say categorically, but one would hope the regulator would take a pragmatic approach.”
Boulding points out the TPR is doing its best to help employers.
“The biggest issue for the regulator at the moment, dealing with large willing employers, is where the legislation is unclear on temporary staff, contract staff, zero hours workers. These are the areas where the rules have to be interpreted. TPR is working proactively. It will listen to how staff are employed and help employers make a decision.”
However he points out that at the end of the day, the employer has to make the decision.
“Employers can look at their contracts, get some advice, decide whom the legislation doesn’t cover, and then minute in a board meeting what they decided and why.”
Among the big employers, market experts say the sectors that face the biggest potential problems haven’t changed dramatically. Some retail businesses may face difficulties as could the hospitality industries.
Deloitte UK financial services partner Andrew Power says: “The retail sector has a lot of part time people, low income people, and has high turnover. It is not attractive for commercial insurance and makes it more likely you will get Nest for these people. There will be a communications challenge because those retailers will be dispersed geographically with people working different hours. Some firms will be paternalistic and encourage people not to opt out, others will be more laissez faire, and take the attitude that if people opt out, people opt out. Some mid size firms are not up to speed and some of this is because they have seen the deadlines slip.”
Barnett Waddingham partner Mark Futcher adds: “There are issues for retail chains, and administrative burdens. They are going to have to certify every pay period and they may have underestimated the numbers.”
Futcher believes that a large number of firms have thrashed out the financials, but not what might be termed the logistics.
He says: “On the cost side, they know how they will deal with it. Lots of companies are holding back pay rises. They were going to give 2 per cent – they are now giving one and a half to help build a pot to cater for auto-enrolment. But every single scheme needs tweaks in some way to eligibility, the contribution structure, the processing of new entrants and payments for contributions. The bigger shock now is to HR and payroll.”
Smith says that he has been urging clients to look at their staging date and work back from it in terms of working out what needs done. He suggests that for larger firms the process should really take 18 months to two years. Some may not have that time and this raises issues surrounding industry capacity.
“The SMEs are starting to get war weary because it has been delayed and things have been cancelled. They are starting to get a bit sick of the whole thing. Many are now saying we’ll leave it until we get quite close “
“They may not have time to think in detail about what they need, but they may need to buy a solution. That brings issues around capacity and the appropriateness of that solution to their circumstances.”
Technology expert Ian McKenna is bearish in his assessment. The director of the Finance & Technology Research Centre places the blame firmly at the door of ministers and the TPR for the level of complexity involved. For example, while TPR sees around three main classes of employee members, he suggests that firms that have completed most of the development systems think there may be eight or even 10.
He also remains unsure that pension firms and payroll firms understand each other’s systems.
The key for him will be whether a solution allows employers to meet their requirements.
“It is our definite view that the extent of support in meeting the employer’s duty will become the critical factor in who gets the pension scheme. The obligations that employers are facing are far from simple. They are very complex and will be challenging for small businesses.
“Some of the providers that have better solutions have people queuing up to join. Some of these solutions are world class but there are only a limited number of them.”
But for the large and medium sized firms, which have not got down to deciding on the detail, the biggest problem may be that they are restricting their own choices.
Boulding says: “The best pension schemes and best providers will fill up. At Legal & General, we haven’t reached that point but there comes a point where you might turn the new business tap down, when you say, I have taken so many bookings I need to fulfil those first. Then the choice might not be as great. But there will be somebody to take the business.”
He adds that there is at least no danger of Nest running out of capacity but that carries the risk that either employees or an employer faces a less than optimal outcome.
“I think the tardy ones underestimate how long it takes to make changes to your pension provision.” That, he says, might see employees losing out by being placed in Nest with the minimum contributions, or it might see an employer having to auto-enrol most employees into an existing expensive scheme.
“We have the green light. Get on and start planning, make the decisions now and do it in a way that is best for your business,” he adds.