Technically, at CFG we’re not all in yet but we will be in the next couple of years. Karren Brady happily tells us that she’ll be in too, as will a rapper named Rochelle, millions of workers and most of the 800,000 staff working for charities.
So, in advance of us launching a new guide for charity employers on how to make sure they get everyone ‘in’ (look out for it this Wednesday), I thought I’d run through some of the background as to what this is all about. ‘Workplace pensions’, or ‘auto-enrolment’ as it’s known in the industry, is the Government’s latest policy to tackle the rapid rate of decline in pension savings.
To put it in context, in 1901 there were 10 people for every pensioner; in 2050 that figure is expected to be 2, and the level of saving has been in dropping too. As of 2012 the largest employers have gradually been adding their staff to a pension scheme through a default opt-in. All employers will have to comply by 2018. As an employee you don’t have to take part, but it’s quite difficult not to. This set up, similar to what’s in place in New Zealand, is a smart and progressive move on the Government’s part. And it seems to be working so far; at our annual conference this year Steve Webb MP, Pensions Minister, said it was a rare example of “a successful government policy, which is why it’s never in the headlines”. But while it’s not been ruffling too many feathers among workers (for many it’s a relief to know their pension is catered for) it’s not been without its headaches. We’ll cover the implementation issues in a further blog, but here let’s look at the main policy quibbles:
- The burden is falling on employers
While this is a government policy, and one that’s aimed at supporting the workforce, it’s largely employers that are bearing the costs. The Centre for Economic Business Research (CEBR) found that the one-off costs of implementing auto-enrolment is more than £22,000 for a firm with 250 to 500 employees, and other industry bodies have suggested some businesses would have to freeze, or even reduce, staff pay in order to cope with the extra costs. The DWP’s own review of 50 of the largest employers, published this August, found that set-up costs (bearing in mind that this cohort are some of the biggest employers in the country) were estimated to be in six or seven figures. They reported that the highest costs were for developing payroll systems, legal advice and holding staff consultations. We can only hope that costs reduce as simpler products are developed, and learning from others is possible.
- Will it make any real difference to savings?
Auto-enrolment will result in up to an additional 9 million Britons saving for their pensions. While this is laudable, some would say it’s too little too late. The amount contributed, a minimum 3 per cent of salary topped-up with tax relief and eventual employer contributions, means that nowhere near enough will be saved to make a substantial difference. A report on the BBC suggests that ‘a 30-year-old who earns £20,000 now, sees a 1% above inflation pay rise each year, makes the minimum contributions permitted, whose investments have a small but regular return and who retires at 70 may receive a pension each year of £2,100 at today's prices’. So not much really! That said, there are those who would argue it’s better late than never.
- Can the market cope with an influx of smaller employers?
Auto-enrolment is an onerous task. Many in the industry are deeply worried about the provision of support for the multitude of smaller employers that will have to comply over the next few years. Providers will essentially be able to cherry pick those they want to work with – and there’s a risk that many will find the door closed by the time they get around to looking for support. At the same time, the Government is consulting on the charges for pension provision – proposing a cap at 0.75% per annum. The fear is that any lower and the already limited providers/supplier pool will shrink further. While low-cost NEST was set up to ensure that no one is left in the lurch, not everyone is convinced that it will offer a competitive deal. That said there are other master trusts such as the Dutch firm Now Pensions entering the market that may serve the smaller end particularly well. It’s this latter question on the market that we’re particularly concerned about for charity employers. Some of the largest household name charities have already complied or, to use the technical term, ‘staged’ but many thousands more will do so in the next few years. Advice from early enrollers in the recent DWP review was to take opportunities to learn from others. This leads to my next point - tomorrow we’ll share more about how the charity sector has been faring so far, and provide top tips to help charities comply. Our good practice guide Auto-enrolment for Charities: A 'how-to' guide is published in collaboration with Foster Denovo, Premier Pensions and Stephenson Harwood LLP.
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