Not all employers will want to communicate the benefits of pension scheme membership. Pam Atherton finds advisers treading a delicate path
With less that a year to go until the start of auto enrolment, the race is on for employers and their advisers to plan their strategies for communicating the new pension regime to their workforces.
A recent report from the Association of Consulting Actuaries, “Workplace pensions: the alarm bells are ringing,” found that employers are already looking at ways to reduce the cost of auto enrolment and just over a quarter of employers have budgeted for the extra cost.
Small wonder then, that advisers attending the Corporate Adviser Auto-enrolment: An Entirely New Pensions Communication Challenge event, hosted in partnership with Standard Life, saw the workplace advice market dividing into two segments: those employers who see value in engaging with the new regime and those who want to do the bare minimum.
Jane Clarke, senior manager communications at PWC, said: “The communications message depends on what the employer’s pensions objective is. For a certain segment of their population, it could be to keep costs to a minimum, so a lot of the message will be around how you opt out and make sure people understand that it’s not compulsory, while not encouraging the employer to do anything illegal. There are ways to make it easier for employees to opt out. Some employers may not even think it is right for the employee because they may not have the job for very long.”
Other employers are taking the view that it makes commercial sense to maximise their return on investment and spend some money on encouraging employee engagement. Ken Anderson, head of DC solutions at Xafinity said advisers can play a valuable role in explaining to finance directors the value of an extra spend on communications, on top of the basic costs of auto enrolment.
Anderson said: “If the adviser can articulate that people don’t currently value their pension benefits, and that with a bit of a spend they can facilitate people in engaging in that benefit, the FD can actually get value out of that £2m he’s spent.”
For some companies, auto enrolment has been the trigger for them to engage with company pensions for the first time, seeing the benefits of pensions rather than just perceiving them as a payroll burden. Sean McSweeney, principal consultant online and flex at AWD, said: “I have picked up four or five 25-man companies which have never engaged before, but they have realised the opportunity for a business return and embraced it. It wasn’t a financial issue.”
McSweeney said that by analysing the cost of workplace churn, advisers can help employers improve key staff retention rates and make the pension scheme self financing, or even save the money.
He cited one example where his firm had been working with one of the UK’s largest nursery providers with 3,000 employees, which had severe retention problems. He had discovered that replacing a nursery manager was costing the company £100,000 and that the company only had to reduce churn amongst that key group by two a year for the increase in contributions of adding those managers to the pension scheme to provide a return on investment.
McSweeney said: “We often use the minimum wage analogy. Do you want to be doing the absolute minimum, which means that people will move for 50p more an hour, or do you want to offer more and retain staff?”
He had also done a cost of turnover analysis for a group of surveyors, looking at respective churn rates for those with a reasonably generous pension contribution compared to those without.
“The churn rate for those in the scheme was lower than for those who were not. But were they joining the pension scheme because they were committed to the employer or because of the tax relief? We did some analysis on how much we would have to raise the pension take-up group in order to mitigate the cost of churn. It was measured and it actually worked.”
He added that the experience of super trusts in Australia was that looking at engagement and communications as a return on investment was the way forward and that this was the most effective way of encouraging employers to contribute more.
Other delegates said they are finding employers loath to have separate schemes for directors and the rest of the workforce. Anderson said: “Some of our employers are saying ’we are not even going there’ because the unions will be on it and if these people come through the business, what are we going to do with them when they get promoted? So some of the proposals I’ve seen to date in terms of how Nest can sit on the side, just won’t work.”
Given that employers are not allowed to encourage opt outs, the issue of how to handle and communicate them is highly sensitive. The recent ACA report on workplace pensions found that larger employers are expecting 12 to 17 per cent of their workers to opt out and SMEs 33 to 39 per cent.
Some advisers thought it was important that those for whom auto enrolment was not appropriate should be told the truth about when it pays to save or not, whereas others thought employers would err on the side of caution for fear of falling foul of the ban on incentivisation and inducement to opt out.
Alex Thurley-Ratcliff, head of multimedia communication at Shilling Communication, said: “It is allowing people to feel in control. We’re currently designing a lot of our auto-enrolment communications from a systems perspective and our opt out is really clearly stated. It is very high up.”
Ann Flynn, head of marketing at Standard Life, said that as long as the opt out was audit trailed, doing it online was acceptable, but warned: “From a TCF perspective, you have to be very careful.”
Advisers agreed that there was a fine line between on the one hand clearly communicating the negatives of pension saving and how to opt out and on the other hand inducing staff to opt out. David Taylor, managing director at Towergate, argued that if a client asked him for help in encouraging employee disengagement, he would turn down the business.
But Clarke thought it was reasonable to make it very clear about how employees could opt out and to send reminders when the opt out deadline was approaching, and argued that some employers would demand a communication solution that did this precisely because it would work out cheaper for them in terms of employer pension contributions.
Beth Richardson, Hymans Robertson senior communications consultant, said if there were workers for whom auto enrolment was not appropriate, it was only right to communicate this.
Richardson said: “You’ve got to put it into the context of people’s lives because going into the company pension scheme might not be the right thing for them. Our role is to make sure people understand the decision they are making and make it easy for them to do whatever they want. If that means opting out, fine.”
But she also stressed that advisers had an overarching duty not to act in a way that broke auto-enrolment rules, meaning communications would have to be balanced and must not induce employees to opt out.
Workers who might gain less from staying put in schemes might include indebted low earners and low paid older workers with no other pension plans for whom means-tested benefits and trivial commutation would outweigh the benefits of saving. Another group which might be better off not auto enrolling could be migrant workers who will never return to the UK.
Richardson was not the only one wary of being seen to encourage opt outs, even where there were good reasons to do so, because of the DWP’s assertion that most people (95 per cent according to its research) would be better off being auto enrolled and the fines which could be incurred for inducements. The threat of enforcement would mean most employers would shy away from communications that trod too close to the line. Anderson said: “If they are going to incur fines and the wrath of the government, then employers are going to stay away from those conversations.”
The communication challenge goes beyond opting out or staying in. McSweeney said he had implemented a pension scheme for Pret a Manger, despite an estimated 70 per cent of its workers being non-UK nationals. One of the main barriers to joining was what would happen if they went home after a few years in the UK.
He had also established a pension scheme at a rubber factory in Tottenham, where 90 per cent of the workforce was Turkish and he added that Standard Life had arranged for all the documentation, except the declaration form, to be in Turkish.
McSweeney said advisers had to be very careful when pointing out that they might not be able to take those benefits ex-UK because that would be an inducement to opt out, whereas Thurley-Ratcliff said there was a difference between ’clarity’ and ’inducement’ and that advisers had to be clear about what would happen if they never returned to the UK.
Flynn said Standard Life’s foreign language communications stated that employees should always consider the long-term implications of their decision.
McSweeney described how one of his clients had looked at using the company pension contribution to pay off student loans: “It might be the right thing for the individuals, great for recruitment and keeping people, but it could probably fall foul of auto enrolment because it could be seen as an inducement.”
Anderson agreed saying that such a course of action would be too risky for the employer and that any perception of incentivisation to opt out could trigger complaints to the ombudsman or legal action by current and former employees.
An alternative for workers not wishing to join a pension scheme could be to have the employer contribution directed to another employee benefit. Anderson said that although he had been told by the DWP and the Pensions Regulator that this was allowed, he thought it was a grey area. “I think it would be dangerous to offer that option personally and have not seen employers looking to offer it. The risk to the business is quite large.