ONE MIGHT HAVE EXPECTED news that the government had already begun introducing a new piece of legislation – one that will criminalise unwary employers and add hundreds of millions of pounds to the wage bill of UK plc – would generate a storm of protest. In reality, although this is what the new auto-enrolment provisions for company pension schemes bring to the table, everything is proceeding in near deafening silence.
This is probably because the phrase auto-enrolment has a somnambulistic quality about it. Just saying the word to average owner-directors of a small to medium-sized business is enough to send them into a mild doze. It looks like a completely innocuous switch from a world in which employees choose to opt in to the company scheme, to one where they are deemed in until they choose to opt out. What could be simpler? But do not be fooled. The challenges and latent threats contained in the auto-enrolment provisions are many and various, and they need to be addressed with vigilance and vigour.
Moreover, the legislation is already being rolled out, with the largest companies, those with more than 10,000 employees, having to comply. From there, the scheme roll-out is scheduled to progress through the ranks to include companies with smaller and smaller numbers of employees. By 2017, even the smallest two-person business will be swept up in the auto-enrolment net.
On the face of it, the case for auto-enrolment is excellent and is predicated on the power of inertia. The government fully expects auto-enrolment to increase the number of people paying into a pension scheme by some six to eight million, with most of these being among the low-paid. There are two separate points to be made here, one relating to employers, and the second to employees who have been auto-enrolled. First, the auto-enrolment regulations put some very specific duties on employers.
Sean McSweeney, principal consultant with financial advisory firm AWD Chase De Vere, comments: “Doing nothing is not an option. Auto-enrolment imposes an administrative burden on employers. They have to assess their workforce to identify all those to whom the regulations apply. Then, once they have arranged for an appropriate scheme and auto-enrolled all appropriate employees into the scheme, they have to have the processes in place to ensure that contributions are made by both employer and employee as specified by the scheme.”
On top of this, employers have to keep the records in place to be able to refund all contributions paid if an employee decides to opt out of the scheme. And each employee that opts out has to be re-enrolled in the scheme once every three years and given the option, once again, of opting out.
If you think about this for a moment, it should become clear that this requires quite a sophisticated workforce monitoring system. Different people will be auto-enrolled into the scheme at different times and those opting out won’t all do so on the same day, or even the same month. Yet three years to the day after they have opted out, they have to be re-enrolled and again given the option of opting out.
For a large HR department, this is just a process to be implemented. For a 100-employee company with no HR team in situ, it is going to be something of a nightmare to keep on top of. The three-year “clock” is individually set for each employee and re-enrolling people is going to be one of the easiest things in the world to forget, thus causing the employer to run foul of the regulations.
Perhaps more worrying is the fact that the regulations also introduce new ways for employers to incriminate themselves. For a start, McSweeney points out, many employers simply do not realise that the regulations make it a criminal act for an employer to attempt to persuade an employee to opt out of auto-enrolment. “I spoke to one employer who said he would tell staff that it simply wasn’t going to be worthwhile for them to remain in the scheme. If he had gone ahead with that line, he could well have faced criminal charges,” McSweeney says. The regulations state that an employer has to be strictly neutral on the opt-in/opt-out decision.
Many employers will be content to accept the default fund which the government has helped create to make auto-enrolment work. The need for a default fund arises from the fact the government decided that being auto-enrolled in a fund should not mean employees are put in a position where they have to start picking and choosing as to how their money is invested. The only way of achieving that is to have them go direct into a default fund.
However, McSweeney points out that the default fund, dubbed the National Employment Savings Trust (NEST), which the government “sponsored” with a £700m loan, is not exactly convincing as the best default option available. He argues that NEST has higher charges and a lower benchmark performance target than, for example, Now: Pensions. This is a scheme backed by the Danish national pensions fund, ATP, which provides pensions for virtually the entire Danish working population, and has been doing so for the last 45 years. ATP has consistently achieved a rate of return higher than the average for the UK pensions industry and it is the fund manager for Now: Pensions.
“Where NEST is targeting 3% plus inflation, ATP averages nearly 10% per annum from a very wide, diversified fund. NEST has a management charge of 1.8% levied on every £1 invested, Now: Pensions plans to charge £1.50 per month on the whole of an employee’s fund, plus a 0.3% per year product investment management fee, which is lower than NEST,” he says. McSweeney’s argument to employers is simple: “You need to make sure that you add value for your employees, and choosing the right default fund is a vital part of this. You really should want to help them maximise their income in retirement.” ?
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