The delay to the implementation of auto-enrolment could undermine the entire project by increasing the risk of opt-out and pushing up the cost of implementation, experts have warned.
Experts from across the pensions industry have attacked the delay as creating uncertainty in the minds of small employers as to whether the policy will ever affect them.
Providers’ business models, particularly Nest’s, will come under pressure as a result of the delay in contributions above 1 per cent from employers and employees until the next Parliament, with lower inflows potentially pushing up overall charges for individuals.
The delay in increasing employer and employee contributions above 1 per cent will also increase the risk of opt-out warns Steve Herbert, head of benefits strategy at Jelf Employee Benefits, as the small pensions accrued through auto-enrolment will be seen as so small as to be not worth bothering with.
Nest could be particularly adversely affected by the delay, says Pitmans Trustees, warning that the ’noose it has created for itself’ with its start-up costs ’could be what hangs it’. Pitmans argues the delay in contribution increases from larger companies and the auto-enrolment of smaller ones will lengthen the time it takes to repay its set-up loan. This in turn will length contribution charge is in place, making the scheme less attractive to employers and employees alike, creating a vicious circle from which it will struggle to escape.
Barnett Waddingham says larger employers considering Nest for a part of their workforce may want to reconsider their position as a result of the delay.
Rob Thomas, associate at Barnett Waddingham, says:
“Bearing in mind that some larger employers unaffected by the delays will be considering Nest for pockets of their workforce, they may need to re-think their strategy as the cost base for Nest becomes uncertain.
Part of Nest’s charging structure includes a 1.8 per cent initial charge which we understand is to broadly repay the government loan to set up Nest over a 20-30 year period. These charges and conditions attached to Nest are due to be reviewed in 2017 and a key factor in that review will be the experience of employers and employees signing up to Nest up to 2017.
“A significant portion of Nest’s target market is small businesses and any delays in auto-enrolment will lead to a reduced initial take up of membership in Nest, which will have a negative impact on Nest’s operational and financial forecasts. Could this lead to an increase in the initial charge in 2017 or repayment of the loan over a longer period – who knows? However, it does create a little uncertainty for employers wishing to include Nest as part of their strategy for dealing with auto enrolment.”
Herbert says: “Many large employers auto-enrolling employees in 2012 at the minimum legal level, and that level then not being increased until, say, 2017, or possibly even later.
For auto-enrolment to have any tangible impact on the savings gap, it will be key that both employee and employer contributions increase quickly from the starting level of 1% of qualifying earnings, as this minimal base level will produce very little pension in itself.
“The longer employees save at the minimum level without increases, the more likely we will get media scare stories about AE and the pension returns. Under these revised terms an employee could save for half a decade (albeit at the minimum level), and yet only receive a pension of a few pounds a year in return. Such stories could put many others off saving, which in turn will lead to higher opt-outs when they are also auto-enrolled.”
Andy Cheseldine, principal at LCP says: “This delay may cause something of a strain for pension providers, including Nest, who will face increased administration burden as a result of more employers being shoehorned into the later staging dates. At the same time it will reduce the expected contribution flow to providers which will impact their business models and, therefore, their pricing structures.
“In some ways, this is most interesting as a comment on how the Government expects the economic recovery to have progressed or, rather, not progressed by 2015.”
Tom McPhail, head of pensions research, Hargreaves Lansdown says: “The government is showing signs of panic. After 18 months of robust pension reform, they are now capitulating to the unions on public sector pensions and betraying small business employees in the private sector.”
Richard Butcher, managing director of Pitmans Trustees says: “Nest’s loan is being recovered through a charge of 1.8 per cent against contributions paid into it. The duration of the loan is ’until it’s repaid’. By Nest’s own estimates this is expected to be at least 20 years. If, however, large numbers of employers and members opt Nest’s pricing model may be flawed thus even that period may be optimistic.
“Commercial rivals to Nest will not be applying an up-front charge, albeit that they may be applying a larger annual management charge. Thus is born a vicious circle: which employer will opt for Nest where their employees may be paying higher charges for an indefinite period of time? The level and the uncertainty will cause more to opt out, leveraging Nest’s repayment problem, increasing the unknown duration, causing more employers to opt out.”
Martin Palmer, head of corporate benefits marketing at Friends Life, says: “This delay could mean that many small employers will increasingly question whether the auto-enrolment duties will ever be applied to them. These changes now mean more confusion for the general public at a time when clarity is most needed.
Paul Goodwin director of workplace savings at Aviva says: “Providers, including Nest, and advisers need to continue to work closely with employers to minimise the cost of auto-enrolment and maintain the momentum behind these important reforms.”
Joanne Segars, chief executive of the NAPF says: “When it comes to pensions, the Government should have stuck to Plan A. These reforms have been a decade in the making, and now is the time to press play, not pause.
“Small businesses are absolutely critical to making these reforms work, because their staff are the least likely to have a workplace pension.
“This decision also risks creating competitiveness issues where small firms are competing with larger companies who are going ahead with auto-enrolment.
“Businesses will quite rightly be wondering how much faith they can have in the system, and whether more upheaval is in the pipeline.”
Helen Dean, managing director, scheme development at Nest says: ” ’Nest is on track and is already working with a number of employers and members ahead of the onset of employer duties next year. Around 40 employers of different sizes and sectors are already live with Nest, with around 60 more due to come on board by October 2012.
“Longer term, the impact of yesterday’s announcement is to change the timing of membership of workers from smaller firms into all qualifying pension schemes, it does not change the eventual numbers expected to start saving for their retirement under automatic enrolment.
“Nest’s charges deliver high quality provision at charges broadly equivalent to 0.5 per cent AMC for most savers throughout their time saving in Nest.”
CBI director for employment Neil Carberry says: “A longer phasing-in period for these reforms will help small firms cope with costs they would have incurred if they’d been brought in during 2014 and 2015. This will not compromise the goal of getting the vast majority of employees saving.”