It is now a little over 3 years since the inception of Automatic Enrolment (AE) and one thing is for sure – it has been a game changer. Every UK employer is facing the same challenge of having to auto-enrol their eligible workforce into a qualifying workplace pension scheme. Whilst over 1 million smaller employers are yet to stage, for many larger employers the next steps of triennial re-enrolment and phased contribution increases are edging ever nearer, bringing with them their own unique challenges. So, let’s take a look at where we are at today.
Firstly, is AE working? Well from a pure numbers game, yes. Since 2012 some 5.5 million workers have been auto-enrolled into qualifying pension schemes with over 59,000 employers declaring their compliance. By 2018 a further 4 million workers are expected to be enrolled, meaning that more people than ever before saving into a pension – fantastic news.
So, saving problem solved? Well not exactly. According to a recent ONS survey the average amount paid into DC workplace pension schemes fell from 9.1% in 2013 to 4.7% in 2014 – a reduction just shy of 50%. The root cause of this is undoubtedly the ‘watering down’ of scheme quality by those auto-enrolling at the legislative minimums. While minimum contributions costs are set to increase in April in 2018, this is all also expected to cause a rise in national opt-out rates, which currently stand at 12%. The minimum contribution increases will place even greater pressure on UK employers to demonstrate the value of their pension investment to employees, and deliver retirement outcomes.
In its current guise auto-enrolment is creating a 2-tier pension system – the haves and the have not’s. Those contributing at the legal minimum, and who probably have not even engaged with their pension since the day they were enrolled, will struggle to achieve any sort of meaningful retirement. That, tied together with the increasing cost of advice, will mean that there will be a plethora of savers with limited funds who are ill-equipped to make informed choices at retirement.
On the other hand there will be those who have the means and whose main concern will be ensuring they do not breach the ever-decreasing pension allowance limits. These are the people who will be more inclined (and able) to pay for advice and can look forward to a comfortable and earlier retirement. So what can be done about it?
More people than ever before are in pension saving – a great first step. In my view, the next natural step is to follow the model of compulsion seen in Australia and New Zealand. More people need to be saving and at a far greater rate than we are currently seeing in the UK. The mind-set has to shift from ‘I can’t afford to pay’ to ‘can I afford not to pay?’ We also need to ensure that those now in pension schemes for the first time are educated and engaged – they have a real responsibility to take ownership of their futures, supported by their employer.
So why does this matter for employers now? For many the hard yards have already been put into AE – schemes, systems and processes are all in place. However the first true tests are approaching and employers need to be prepared.
Firstly, re-enrolment has already started for the largest employers, meaning that employees who have opted-out previously are being re-enrolled back into pension saving. Re-enrolment rules can be complicated but there are flexibilities and opportunities available for employers to manage this effectively, for example, the flexibility to move re-enrolment by 3 months either side of the 3 year anniversary, or the ability to exclude those members who have protection from the re-enrolment process.
But secondly, and no less significantly, fixed minimum contribution increases are now on the horizon, albeit moved back to a slightly later date of April 2018. Employers need to start planning and budgeting now to see how this will impact their total reward spend and fully integrate auto-enrolment into their wider reward strategy. How can employers strike the right balance between managing cost, driving engagement and ultimately delivering a return on an ever increasing investment? Arguably the real challenges are only just starting for employers, and careful planning will have a major impact on their success at keeping employees engaged and saving for the future.
To find out more about planning for re-enrolment, view the recording of our recent webinar, 'Auto-Enrolment: Is it time to stick of twist?' featuring Nick Lawry, Reward Manager at Virgin Management.