The Olympic Games have passed without incident; meaning only two major events still have the potential for cataclysmic consequences for the UK in 2012. The first event is the ‘2012 phenomenon’, which comprises a range of eschatological beliefs, claiming transformative events will occur on 21 December 2012. This is the end-date of a 5,125-year-long cycle in the Mesoamerican Long Count calendar.
Fundamentalists believe the 2012 date marks the end of the world or a similar catastrophe and scenarios suggested include the arrival of a ‘solar maximum’ of exceptional strength, with the radiation from the sun wiping out life on the world – or Earth’s collision with an object such as a black hole or perhaps a passing asteroid.
The second event is the commencement, next month, of pensions auto-enrolment.
It seems ‘scholars’ in the pensions field have been debating the eschatology of the pensions agenda, as we know it, for the past 5,125 years – well, 20 anyway – as the numbers of defined benefit (DB) pensions, most notably final salary schemes, have diminished in all but the public sector. This gave rise to defined contribution (DC) pensions, where staff and employers both contribute to a pensions pot.
The Government launched its much-anticipated stakeholder pension in April 2001, aimed at helping more people provide better for their retirement. ‘Stakeholder pensions’ were designed as ‘second pensions’ in addition to the basic state pension, which was seen by experts as being ‘unlikely to provide enough income’ for most people in their retirement.
They were intended as an alternative to personal pensions for those without access to company (occupational) pension schemes.
Then pension simplification took effect on 6 April 2006 – felt to be so important it was named ‘A-day’. It was a policy announced in 2004 by the then Labour government, to rationalise the tax system applied to pension schemes. The aim was to reduce the complicated patchwork of legislation built up by successive administrations and seen as acting as a barrier to the public when considering retirement planning.
The aim was to encourage retirement provision by simplifying the previous eight tax regimes into one single regime for all individual and occupational pensions.
Six years later and two years into Coalition, state pensions have definitely been at the top of the Treasury’s agenda this year. In his Budget statement in March, the chancellor of the exchequer George Osborne announced a flat-rate state pension of £140 per week.
But with the removal of the default retirement age, a need for longevity in pensions annuities and too many employees retiring to receive meagre occupational pension pay-outs on top of their state pensions, the Government has moved to help employers take the pressure off the state by investing more in their occupational pensions to support their staff in retirement.
All the changes, development, simplification (?) and noise around occupational pensions schemes now seem to be leading to one decision – auto-enrolment. This comes into effect for the UK’s largest companies less than a month after you will read these words and will mean that, by 2017, every employee in the UK must be automatically placed, by their employer, into a pension scheme.
The rules are simple: employers will be required to auto-enrol eligible employees into a ‘Qualifying Workplace Pension Scheme’ (QWPS). The QWPS will be either an employer-sponsored pension arrangement that satisfies quality tests, or a National Employee Savings Trust (NEST) arrangement.
Eligible employees will be those aged between 22 and state pension age, who have earnings above the standard personal tax allowance of £7,475 (in 2011/2012 terms). Employees at other ages will be able to opt in, as will employees who have earnings above the primary threshold for National Insurance contributions (currently £5,715). Qualifying staff must be auto-enrolled within the first three months of employment, but employees can request to be enrolled earlier and the employer is obliged to act on this. Individuals can opt out of the QWPS, but employers face financial penalties if they induce this. Employees choosing to opt out will face auto-enrolment every three years.
So with staff being auto-enrolled into occupational schemes, it seems the penultimate piece of the Government’s jigsaw to move retirement benefits from the state onto the employer is being slotted into place – but will the last piece be mandatory enrolment?
Will it become the norm that employers, not the taxpayer, fund the retirement years of the population?
In short then, is auto-enrolment a prelude to Armageddon of the state pension?
“Mandatory enrolment is the way the Government plans to remedy the pensions crisis,” says Robin Hames, head of technical, marketing and research at consultancy Bluefin. “Mandatory enrolment will be more effective than auto- enrolment and more politically desirable. But then again mandatory enrolment will always have the stigma of being seen as a tax by employees.”
And James Biggs, head of corporate pensions at Lorica Employee Benefits, agrees: “I don’t know if I am a visionary, but I have been interested in the Australian model of mandatory enrolment for about 12 years. I’d love to get to age 67 and have something from the state – but I’m just not convinced I will. I just have reservations that the financial climate doesn’t lend itself to businesses having increasing pension costs.”
Pensions minister Steve Webb has publicly said if the auto-enrolment legislation does not go far enough to encourage staff to save more for retirement, he would legislate further. And with plans in the pipeline to investigate “simplifying” income tax and National Insurance contributions into one single payment, ears have pricked up. Some experts have gone so far as to claim this could be one more paving stone on the route to employers replacing the state in funding pensions – with legislation, as in Australia, forcing them to contribute to employee retirement pots.
Sylvia Spencer, partner and head of the tax and company secretarial departments at Russell New, a West Sussex-based firm of business, tax, and charity advisers, is one such believer.
“It is inevitable auto-enrolment will lead to compulsion,” she asserts. “The Government can’t afford to fund state pensions – but compulsory enrolment into pensions could be perceived as a stealth tax. The Government’s only option would be to increase NICs and this would be unpopular.
“It’s all a bit cloak and dagger at the moment, but employers that are not prepared to help with this are short-sighted. Making such changes to pensions will be politically easier for the Government.”
One employer who is keen to get on with mandatory enrolment is Mel Missen, VP HR for EMEA at data marketing company, Acxiom.
He says: “I don’t see auto-enrolment as a positive step. It will be an administrative nightmare. It is political and not economic and those that can’t afford to contribute, won’t.
“The system is flawed, the contribution rates set [8%] are pitiful and this is a pathetically ridiculous waste of time.
“Mandatory enrolment will be better. It will reduce the burden [of administration] on employers and it will allow them to project costs effectively. From a professional perspective, this would not be an issue for us, because we offer a good pension plan. I believe in a state pension system, but ultimately I believe in personal responsibility to save.”
But should it be the duty of the employer to take on the obligation of the state pension?
Alan Morahan, principle in DC consulting at pensions advisory firm Punter Southall, doesn’t necessarily think this will be the case.
He explains: “While the aim of pensions legislation is to move the burden of retirement funding away from the state, it won’t involve the abolition of the state pension – this would never be grabbed. I also think the amount of support from employers is varied. Some are doing a lot around pensions, rousing interest among staff and introducing high contributions, whereas some would argue they are there to provide employment and pay a wage.
“This opens a debate as to who should pay for retirement.”
Logan Anderson, head of customer relations at not-for-profit occupational pension scheme, the Pensions Trust, adds: “The proposals to bring together income tax and national insurance should lead to employers taking a lot of pressure off the state with regards to retirement savings for the lower paid. For those higher up the income scale, the Government should probably expect these to be covered by the basic (universal state) pension, plus any private savings. For those at the lower end of the income scale, Government is hoping private provision will encourage more personal responsibility by members, thus reducing the burden on the state. Does this mean employers are taking the pressure off the state? If you like, but with employees.
“I would suspect that occupational pensions might replace the state pension. I could see a situation where the basic universal pension becomes means-tested, at least in part, athough the Government has said no such thing and I wouldn’t expect it to, because this is a real vote-loser.”
Matthew Mitten, a partner at pensions communication advisers Secondsight, elaborates. “These are very troubling questions,” he says. “We are so used to the state providing a pension for us and although you would never see a politician saying it, I can’t see that it’s anything but a case of the state giving pension responsibility to employers.” But he adds: “Either this, or individuals will have to pay for retirement. In the ‘KiwiSaver’ model in New Zealand, auto-enrolment is in place, but it is the employee that has to pay more, not the employer. The Government has to find a balance, so employers and employees can share the cost, but not view this as a pensions tax. And there is the issue of how the media negatively reports on pensions.”
With the media furore surrounding dwindling pension pots and frequent news reports and damning headlines about changes to pensions in the public sector and the proposed end to final salary schemes for public service staff, confidence in occupational pensions among employees has, perhaps understandably, fallen in recent years.
The Department for Work and Pensions published research in July showing a drop of 15% in employees’ pension savings since 2007.
Only a quarter of private sector employees are active members of their employers’ pension scheme in the UK (26%), down from a third (31%) in 2007. Only 31% of private sector organisations currently offer any pension provision for their staff, down from 41% in 2007.
This strengthens the Government’s argument to nudge – and then potentially compel – employees into pension schemes. The research found, post auto-enrolment, that 45% of firms without a current workplace scheme intend to enrol all their employees into NEST. A further 11% say they will set up their own scheme, while 5% say they will use a combination of both.
But one point the pensions industry does agree on is that contributions totalling 8% of salary (the minimum proposed by the Government) will not be enough for an employee to retire comfortably on.
Secondsight’s Mitten explains: “If an employee were to start pension contributions of 8% when he or she in their 20s and their fund performs ‘OK’, they will receive about a third of their salary in retirement. If they start pension contributions of 8% in their 30s, it is more likely to be less than 25% of their salary.”
Rachel Boughan, head of auto-enrolment at Mercer, adds: “With auto-enrolment, the Government has gone for a softer option than mandatory enrolment and this is a huge challenge for employers, but I think the biggest problem here is the contribution rate; 8% is just not enough.
“In Australia, the rate is already being pushed to employer contributions of 12%. In the UK, the difficulty will come if employees believe 8% contributions are enough to retire on and then retire seeing that a big amount of savings has not come home to roost.
But she adds: “The Government will be more likely to implement mandatory enrolment if auto- enrolment opt-out rates are high. If the take-up is good, its next move will be to increase contributions.”
But the experts are unsure about what a good rate of take-up on pensions would be.
Anderson thinks a 50% take-up rate would not be deemed successful and the Government would hope for a take-up rate in the region of 80%.
But according to Bluefin’s Hames, it could be as late as 2027 before any further changes to pensions legislation take place.
He adds: “A 70% to 80% participation rate [in DC pensions] will probably be achieved over the next five years. If this is deemed a success when auto-enrolment is reviewed in 2017, then the debate over mandatory enrolment could be, at least, postponed, probably for a decade, to allow the auto-enrolment concept further time to bed in.
“The Government won’t want to keep occupational pensions under constant review. In the meantime, the focus will be on simplifying the state pension structure before any moves are made to connect it to auto-enrolment.”
Richard Wilson, senior policy adviser at the National Association of Pension Funds (NAPF), agrees. “It has always been the plan to make enrolment into pensions mandatory, but for the meantime the Government will be focused on making auto-enrolment work and then contribution rates. At the moment, it looks like auto-enrolment will get people into saving.” But as one era of the pensions calendar ends and a new one dawns, for the most part, while holding its breath, the pensions industry – as well as employers such as Axciom and House of Fraser (see box) – are waiting with an air of optimism.
Morten Nilsson, CEO of auto-enrolment provider, NOW: Pensions, says: “I am optimistic. This is the start of a massive change, when everyone working will be enrolled in a pension. Contributions will go up past 8% quickly and there are some good pension products out there.
“It is a strange position, though, because while there is limited faith in pensions now, we have a chance to change this,” Nilsson added.
Spencer is more cautious. She adds: “For people whose pension funds have been pillaged as they near retirement, I hope there is a more rosy future. We are moving in the right direction – but while we have a global leading welfare system, this is what can cause governments to go bust.” But Broughan believes the onus is on employers – and indeed wider society – to take responsibility for pensions as early as possible.
“Communication is the key to the success of pensions – or else there will be a massive fall-out,” she asserts. “Pensions legislation will be useless unless the communications and management of saving are right. Employees need to engage with saving – and I would like to see this culture start as early as in schools.”
And on the topic of pensions eschatology, she muses: “If the communications around encouraging employees to save is right, we have got to be optimistic about the future. If not, then I will wait for pensions to implode.”
Like the Mesoamerican Long Count calendar, time could be running out.
NAPF: Pensions Quality Mark
The National Association of Pension Funds (NAPF) launched its pensions quality mark (PQM) in September 2009.
PQM recognises DC pension schemes with good governance and communications, and with a total contribution of 10% (with at least 6% from the employer).
Age UK, the charity that aims to improve later life, last month became the latest employer to achieve PQM status.
PQM distinguishes pension schemes that are well run by employers, whose contribution rates are good, and that are clearly communicated to members of staff.
Jane Vass, head of public policy, Age UK, explains: ”It is more important than ever for people to plan for their future, and offering a good pension is a vital step in helping our staff prepare for what’s ahead.”
Age UK is one of the 157 organisations to be awarded the PQM, which now covers 300,000 scheme members, including 1,050 of Age UK’s staff. Other holders include Volkswagen, L’Oréal and Michelin.
Case study: House of Fraser confirms new pension scheme
House of Fraser is a department store group with 63 locations across the UK and Ireland and employs 7,300 House of Fraser staff and 11,000 concession staff.
In a bid to pre-empt auto-enrolment legislation, the company launched a group personal pension (GPP) for its 7,300 UK employees in July, following a thorough review of the company’s pension arrangements.
The launch date coincided with the closure to future accrual of House of Fraser’s defined benefit (DB) scheme at the end of June 2012.
The GPP has been designed to: lower charges for active members than had been available in their previous defined contribution (DC) scheme; provide more effective communications and member support, to reflect the Pensions Regulator’s focus on the importance of employee engagement; improve administration and scheme governance; be ready to meet all auto-enrolment requirements ahead of the staging date; and be suitable for all employees, including House of Fraser’s auto-enrolment population.
It is hoped House of Fraser’s contract-based, defined contribution scheme, provided by Aviva, will reduce the costs associated with the scheme for active employees by 35%, compared to the previous stakeholder scheme.
Suzanne Willshire, House of Fraser’s pensions manager, explains: ”We wanted to ensure our brand and values are instilled through the pension scheme and we worked with the communications team at Johnson Fleming to create bespoke literature and engaging launch campaign materials.
“We have also developed a pension microsite to enable all employees to manage their retirement planning online. We included group presentations and individual meetings as part of our structured communications plan.
“Targeting key messages to different groups of employees is important, as we are rolling the new scheme out over several months. Employees who were previously members of our DB schemes were invited to join first. Those who were in our stakeholder scheme are being invited to join now and we will then move on to [remaining staff].”
Australia: three pillars
Australia has a three-pillar pension system. The first, public, pillar, is made up of a means-tested, tax-financed old age pension that provides basic benefits; the second is made up of funded individual pension accounts provided by superannuation funds; and the third pillar involves individuals contributing to their superannuation funds or to retirement savings accounts (RSAs).
Apart from the Military Benefits Superannuation Scheme, most public defined benefit (DB) superannuation schemes are now closed to new members.
Australia introduced compulsion into occupational schemes in 1992, when it made contribution into the superannuation fund system mandatory for all employees older than 17 and younger than 70 earning more than $A450 a month.
This is a defined contribution (DC) system that requires a minimum contribution to a superannuation fund.
The country has several superannuation funds, including industry-wide funds and retail funds, which are offered to the public and to employers by financial service providers. Employees may make voluntary contributions and employer contributions are subject to an annual cap of $A50,000.
Employee contributions are matched by a factor of 1.5 additional up to $A1,000 per year by the government. This matching contribution is made for employees earning less than $A58,980. Employer contributions are tax-deductible up to certain limits, while employee voluntary contributions are entitled to limited tax breaks. Pension payments, too, are entitled to tax breaks, but these are under review.
Denmark: bringing home the bacon
Danish employees are automatically entitled to a state pension. Many people also have a company pension or a collective pension as part of their contract of employment. It is also possible to set up a private pension scheme on top of this.
Anyone who has lived in Denmark for 40 years after turning 15 years old is entitled to a full state pension. The Danish state pension is paid to people over the age of 65. Statutory pension schemes are supplementary pension insurance schemes that are split into two different contributions.
Company pensions are a common feature in Danish employment contracts and are considered an important complement to the state pension scheme. Employees are usually offered this pension scheme during the recruitment process. Between the worker and the employer, approximately 15% of the employee’s salary is paid as a contribution to the scheme. Companies in the private sector often have an agreement with a pension fund, which offers an additional health insurance policy, covering disability, critical illness and death.
Employees are also able to set up a private pension scheme with a pension fund or a bank. Their level of income will normally determine whether the money will be paid out as a single payment (capital pension scheme) or in instalments.
US: a ‘safer’ option
In the US, employers are allowed to automatically enrol their employees into 401(k) retirement savings account plans, requiring employees to actively opt out if they do not want to participate. Until 2008, the 401(k) required employees to opt in.
Employers offering automatic 401(k)s must choose a default investment fund and savings rate. Employees who are enrolled automatically will become investors in the default fund, although they are still permitted to select different funds and rates if they wish, or even to opt out completely.
Automatic 401(k)s are designed to encourage high participation rates among employees. Therefore, employers can attempt to enrol non-participants as often as once per year, requiring those non-participants to opt out each time, if they do not want to participate. Employers can also choose to automatically escalate participants’ default contribution rate, encouraging them to save more.
The Pension Protection Act of 2006 made automatic enrolment a ‘safer’ option for US employers.
Prior to the Pension Protection Act, employers were held responsible for investment losses as a result of such automatic enrolments. The Pension Protection Act was designed to create a safe harbour for employers in the form of a Qualified Default Investment Alternative (QDIA), an investment plan that, if chosen by the employer as the default plan for automatically enrolled participants, relieves the employer of financial liability.
Under US Department of Labor regulations, three main types of investments qualify as QDIAs: lifecycle funds, balanced funds, and managed accounts. QDIAs provide sponsors with fiduciary relief similar to the relief that applies when participants affirmatively elect their investments.
New Zealand: super-size me
The ‘KiwiSaver’ is a voluntary, work-based savings initiative to help with long-term saving for retirement. It is designed to be hassle-free, so it is easy to maintain a regular savings pattern.
There are a range of membership benefits to encourage staff to save. They include a $NZ1,000 kick-start, regular government contributions and an annual member tax credit paid by the Government. Some people may also be eligible for help with the deposit on their first home.
Private sector companies called ‘KiwiSaver providers’ manage KiwiSaver schemes. Employees can choose which KiwiSaver provider to invest their money with.
KiwiSaver is not guaranteed by the government. This means employees make investment choices in a KiwiSaver scheme at their own risk.
For many people, the KiwiSaver option will be work-based. This means staff receive information about KiwiSaver from their employer, and KiwiSaver contributions will come straight out of gross pay. If employees choose to join, contributions are deducted from pay at the rate of 2%, 4% or 8% (employees choose the rate) and invested in a KiwiSaver scheme. The employer must contribute at least 2%.
For those that are self-employed or not working, individuals agree with a KiwiSaver provider how much they want to contribute, and make payments directly to them.
KiwiSaver savings will generally by locked in until staff are eligible for NZ Super (state) pension (at age 65), or if they have been a member for at least five years (if they joined over the age of 60).
Staff may be able to make an early withdrawal of part (or all) of their savings if they are: buying their first home; moving overseas permanently; suffering significant financial hardship; or seriously ill.
NZ Super provides for a basic standard of living in retirement, but it may not be enough for the kind of retirement employees expect. Having a KiwiSaver account doesn’t affect employees’ eligibility for NZ Super or reduce the amount of NZ Super they would be eligible for.
Instead, KiwiSaver savings are intended to complement NZ Super saving to provide people with a better standard of living for retirement.