Auto-enrolment: the story so far and what the future may hold
The biggest employers, many of them in the public sector, started auto-enrolment from July 2012, but the government’s timetable for implementation means that initial trickle is set to become a flood.
From this month, employers with 1,250 people in their PAYE tax scheme begin auto-enrolment and the employee threshold drops to 800 from October, 500 from November and 350 from January 2014. By next summer it will be down just over 60 and eventually 1.35 million employers will have to comply. So for many union reps and members, the time to get the best deal out of auto-enrolment is now.
Unions have generally been supportive of auto-enrolment, as have employers, with the majority backing it, even among those employing under five members of staff. By making people join and guaranteeing at least a minimum employer contribution, pension non-membership can be whittled down and pension saving encouraged.
When builders’ merchant Travis Perkins signed up 9,000 employees this summer (out of a workforce of 24,000) chief executive Geoff Cooper said it had helped overcome some of the employees’ “retirement savings inertia”.
Kelly Trew, a departmental secretary at the company, agreed: “Even though I knew I should be saving for my pension, it was just too much hassle before. So when I started hearing about the new scheme at work, the fact that I would be automatically enrolled into the pension made the decision for me. And now I’m looking to see when I can put more money in.”
It’s a scenario unions can relate to. An engineering rep told Workplace Report: “Auto enrolment has allowed me as a trustee to force members to enrol who would otherwise not be interested because they are either young and have other priorities; or are old and have already accrued contributions elsewhere; or are temp/agency workers who cannot see the point if their employment is not stable enough.”
Extent of auto-enrolment
By the end of July, 1,600 employers had registered with the Pensions Regulator to confirm their compliance. These were mainly large organisations with an average workforce size of 5,500, so even at this early stage almost 8.8 million workers had been assessed.
But only those who meet the eligibility criteria: aged 22 to State Pension age; earning £9,440 or more; and who are not already members of a qualifying workplace pension scheme had to be signed up. That turned out to be 16% or 1.4 million of the 8.8 million workers.
Of the remainder, 55% or 4.8 million workers were already members, in some cases because their employer anticipated the new statutory duties and auto-enrolled them before their official “staging” date. That seems to have been the case at First South Yorkshire Buses, for example, which had to get started in early 2013, but which has been enrolling all new employees with two years’ service for more than a year.
Around 325,000 workers — or 3.7% — had auto-enrolment delayed under a “transitional” option for employers planning to use a defined benefit (DB) scheme.
The remaining quarter (25%) — or 2.2 million workers — weren’t enrolled because they did not meet the eligibility criteria. Although some of these may have subsequently joined on a voluntary basis, it highlights one of the shortcomings of the statutory scheme.
It is the Pensions Regulator’s role to maximise compliance with the employer duties set out in the 2008 Pensions Act and to ensure that certain safeguards are in place to protect workers. It seems that most employers are now aware of all three key features of the reforms: the need to automatically enrol UK workers; to provide a qualifying pension scheme; and to make employer contributions.
But data on clicks on the regulator’s website suggest that what employers most want to know (after their “staging date” when auto-enrolment starts) is about contributions, their duties, and how to define workforce eligibility. It seems they may be less aware of their duty to register with the regulator and communicate with individual workers. There has also been some concern that they will leave things until the last minute. Consultants (such as financial advisers, brokers, accountants or bookkeepers) may become involved and these are all issues that union reps may want to look out for.
Benefits of auto-enrolment
The GMB general union has described auto-enrolment as a positive step to get the UK saving for retirement. Nevertheless, it has emphasised the need to ensure automatic access for all UK workers, regardless of age or earnings. That, and other aspects of auto-enrolment implementation, should be open to consultation and negotiation.
On the evidence available so far from a limited range of private sector union reps, it’s perfectly possible for the start of auto-enrolment to be a “good” or “very good” experience.
It can mean;
• higher than statutory contribution levels, such as at Perkins Engines where the employer will be doubling what the employee pays, up to 10%;
• increased participation with more involvement from the low-paid staff at Northern Powergrid; or
• extra benefits, like free death-in-service benefit at First South Yorkshire Buses.
Auto-enrolment to existing pension schemes
The first question the trade unions are likely to want answering is whether a new or an existing pension scheme will be used for auto-enrolment.
In the public sector, auto-enrolment generally means joining one of the existing schemes — for example, the Local Government Pension Scheme, Teachers’ Pension Scheme, NHS Pension Scheme and Civil Service Pension Scheme. Where necessary the rules of these schemes have been amended to comply with the 2008 Pensions Act.
And so far, on the basis of very limited evidence, enrolment into an existing scheme is certainly a possibility in unionised private sector workplaces too.
The nationalised Royal Bank of Scotland (RBS) used its existing defined contribution (DC) scheme to start auto-enrolment in late 2012. The West Midlands engineering firm, Meggitt Aircraft Braking Systems, will be doing the same later this year.
One road transport company will be using its existing scheme, but with a new default level of contributions that mirror the statutory minimum, which the government has initially set at 1% from members (including tax relief) and 1% from the employer. In this case too, higher contribution levels remain available.
But a union official expressed concern at that practice, which seems widespread. “Our great fear is that promotion of these higher tiers is not adequate and as a consequence, although the number of people in a pension scheme might increase, the average contribution rate being paid (by both employee and employer) is reducing. We favour enrolment at the existing rate,” they said.
Auto-enrolment to new schemes
A new scheme has been used for auto-enrolment by furniture manufacturer Howdens and that approach seems to have been common in the transport and bus sectors. At First South Yorkshire Buses, negotiations have already led to changes in the existing DB and DC schemes, but it was agreed all new starters from April 2013 would go into the new “Bronze” scheme. They will not be able to access the other schemes for nine years.
A rep told Workplace Report: “This is a significant reduction in the pension options available to new starters who previously after two years could join either the Silver or Gold schemes”. The Bronze scheme is, however, a 5% DC scheme matched by the employer’s 5%, which is above the statutory minimum contribution level.
The Pensions Regulator anticipates that new schemes established for auto-enrolment are likely to be DC rather than DB or hybrid, and has been working to promote good practice in schemes of that kind. Food manufacturers United Biscuits and Unilever are exceptions in that they are using DB schemes, although in Unilever’s case it has moved from final salary to a career average basis.
Mangement charges in auto-enrolment schemes
Where DC is used for auto-enrolment there is still a choice to be made between an “occupational” pension run by a trust and a personal pension.
Department for Work and Pensions (DWP) research suggests that trust-based schemes have a lower average annual management charge (0.71%) than those run by an insurance company (0.95%), although some concerns were recently flagged up by the Office of Fair Trading.
Trust-based DC schemes are being used for auto-enrolment at the National Australia Group (owners of the Clydesdale and Yorkshire banks) as well as RBS, Northern Powergrid and Perkins Engines (Peterborough).
Management charges are lower in large schemes covering 1,000+ employees (average 0.48%) and smaller companies can access bigger schemes by joining a multi-employer pension.
Most of the companies mentioned are using single-employer schemes, although these can cover a range of different operating companies or subsidiaries. Food manufacturer Greencore is one of the exceptions, using the government-sponsored NEST scheme, which by May this year had 100,000 members and was working with over 300 large organisations.
Impact of auto-enrolment on existing pension schemes
Some slight modification to existing schemes is likely when auto-enrolment is introduced, but it can also involve more significant modifications, “levelling down” or even the closure of an existing scheme.
DWP research carried out before auto-enrolment found that between 2005 and 2010 the proportion of employees experiencing some form of levelling down rose from 8% to 11%. But it concluded that over 90% of employers who make contributions of 3% or more “would not change their scheme or reduce contribution levels for existing members in response to an increase in total contribution costs”.
At aerospace components group Aircelle Burnley, where a new scheme has been set up for auto-enrolment, the existing DC scheme (which non-members can join instead) is expected continue without any or significant change. There’s been some change to the existing DC Scheme at RBS, with new entrants being auto-enrolled on 10% company contributions rather than the usual 15%.
At bus company Go-North East, existing DC and DB schemes are now closed to new entrants and the DC scheme (which was for new entrants) is closing completely from next month. A new DC scheme set up for auto-enrolment, based on the statutory minimum contribution rates, will not have the same level of benefits, but members will be able to secure matching employer contributions if they pay an extra 1% or 2% above the initial auto-enrolment contribution minimum, once they have been in it for a year. Additionally, life insurance increases, from matching a salary to two times it.
Will increased pension costs lead to lower pay settlements?
Employers looking to save money might set their sights on a lower pay deal. DWP research found that around 17% of employers said they would absorb the increase in costs through lower wage increases; 15% would do it through price increases and 12% through workforce restructuring or reduction.
At a finance company, auto-enrolment was directly cited by the HR department as a reason to keep costs down this year — despite the fact that its existing scheme (not affected by auto-enrolment) has much more generous employer contributions — 5% on average, depending on the employee contribution. The new scheme has the company paying 2% and employees 1%.
Employer contribution levels to auto-enrolment schemes
However, in a more positive case, the pension calculation will now include bonus at a publishing company, which is using an existing DC scheme for auto-enrolment.
The value of a DC pension depends very much on its contribution levels. For statutory auto-enrolment, the initial minimum is just 2% of qualifying earnings of which the employee may be required to contribute 1% (0.8% plus tax relief). Minimum contributions will rise by 2018 to 4% from the employee (plus 1% tax relief) and 3% from the employer.
Employees may not have to contribute as much provided that the employer ensures the minimum overall contribution is met. And the employer is free to auto-enrol employees into a scheme that exceeds these minimums.
Many of the companies mentioned in this survey do pay more than the statutory minimum. On the basis of very limited evidence, contributions may be higher where an employer uses an existing scheme for auto-enrolment (such as 3%-4% rather than 1%-2%).
The highest employer contributions in schemes used for auto-enrolment — 10% — involved existing workplace pension schemes. Nevertheless, there were examples of employers paying the minimum in both new or existing cases, so this is a key negotiating issue.
Higher-paying new-scheme employers include Dwr Cymru (Welsh Water) which pays a minimum of 6% (although if the employee contributes 6% the employer will pay 11%). Severn Trent Water also pays 6%, but could pay up to 15% under certain circumstances.
As in these examples, DC pension schemes frequently offer higher employer contributions if the member pays more and there seems to be every chance of negotiating for that, whether the scheme used is new or existing. Salary sacrifice arrangements can be used as long as they don’t contradict the rules for being a qualifying scheme.
Pension contributions are usually calculated as a proportion of pensionable or “qualifying” earnings. For auto-enrolment purposes employers only have to count earnings in a band currently set at £5,668-£41,450. However the chances of one of the companies mentioned paying from £1, whether they use a new or an existing scheme, seem to be pretty good.
There is also a statutory definition of what counts towards qualifying earnings and this may be another area for negotiation. The standard list is salary, wages, commission, bonus, overtime, statutory sick pay, statutory maternity, paternity and adoption pay but again it may be possible to add to this. At Severn Trent Water, some contractual and premium payments will be taken into account.
This may also be an issue where there are multiple pension schemes. At a finance company, where a new DC scheme is being set up and the existing one closed to new members, the union rep said: “As they will be running two schemes in future I cannot see the company wanting to complicate matters by having a dual system which would also have tax calculation implications.”
Extending employer contributions to other employees
Employers are only required to auto-enrol those aged between 22 and state pension age, and earning more than a threshold currently set at £9,440. Other employees have a right to opt-in to the employer-funded scheme, or to join a scheme voluntarily without the same legal right to receive employer contributions, depending on whether they earn above or below £5,668.
But there is clearly scope to negotiate a more inclusive approach — after all, all civil servants are being enrolled into the Civil Service Pension Scheme regardless of age or earnings.
Among the examples mentioned here private sector unionised employers seem most likely to encouraging young workers to join. At Perkins Engines (Peterborough), staff such as apprentices are to be encouraged to join even if they are under 22 years old; Heineken UK is another example.
There is also encouragement for those in the earnings band of £5,668 to £9,440 join: £5,668 is the annual salary at which earnings have to be taken into account for the purposes of calculating pension contributions under the statutory scheme and £9,440 the salary at which workers must be automatically enrolled.
That’s the case at Aircelle Burnley: “All employees regardless of pension status will receive information. Those who fall within the system for auto-enrolment will be notified of their choice to opt-out; those who do not automatically fit in the auto enrolment profile will be notified where it applies that they could join”.
Some are encouraging workers over state pension age to join — First Group, United Biscuits and financial services firm Aviva. And some are doing so for those earning less than £5,688, with a college offering to pay employer contributions for them even though it is not a legal requirement under auto-enrolment rules.
Level of opting out
The benefits of auto-enrolment will be undermined if significant numbers of employees decide to opt out once they’ve been enrolled. It’s an outcome that unions like public sector union UNISON hope to discourage.
It has urged its members to consider the decision carefully, as a pension can help protect them against poverty in old age. Opting out would also mean giving up “free money” from the employer, tax-exempt contributions, a tax-free cash sum for retirement and potentially other gains, such as a death benefit.
Employers don’t have to tell the regulator, but anecdotal evidence and pensions industry research point initially to drop-out rates of below 10%. That chimes with NEST Corporation evidence of less than 10%, and pre-auto enrolment research by the DWP suggesting that 9% would definitely opt out.
Among companies mentioned here the levels fall either side of 10%, with higher-end expectations coming from manufacturing (Howdens) and road transport with an estimate of 25-50% at one company.
The most common justification for opting out seems to be affordability, but there are also those who believe they’d be better off not saving. Changes to the Local Government Pension Scheme in 2014 will include a 50/50 contribution flexibility option, allowing half of main benefits to be accrued on a 50% contribution rate. The option is designed to provide a short term alternative to those considering opting out of the scheme.
Young people are also seen as vulnerable to opting out, along with those who already have their own way of saving for retirement, or are close to retirement. These thoughts may weigh more heavily than concerns about risk, or the value of the pension on offer, or because it’s just too confusing.
Communicating information about pensions
The statutory auto-enrolment regime is strict about the sorts of communication that employers must conduct and this could be an opportunity to improve matters.
A big improvement in communication was reported at United Biscuits (Midlands Distribution Centre) and Go-North East. Improvement too at RBS reflected a recognition by the employer that more needs to be done to encourage retirement saving.
At Meggitt Aircraft Braking Systems, the union has got management to arrange road shows conducted by Legal and General for those employees not in a pension scheme. But at a bus company union reps felt the employer did not explain the changes or offer help or advice. And at an engineering company there was “one global e-mail telling all employees that those not in a scheme will be will be receiving details about auto enrolment, which went out on the qualifying day”.
Consultation and negotiation should be taking place on this bread and butter issue. There have been national negotiations in the First Bus group where union members are pension trustees and letters were sent to all existing scheme members. But at the Go-Ahead group, despite the union being consulted, its views were not taken into account and only minor changes were conceded.
Among those whose auto-enrolment arrangements are not yet known, the chances of being able to use an existing scheme, and of getting their employer to go beyond the minimum requirements and adopt an inclusive approach, are there to be negotiated.
Monthly registration report
Employers’ awareness, understanding and activity relating to workplace pension reforms
Regulating work-based defined contribution (DC) pension schemes
Other information on auto-enrolment
Department for Work and Pensions
Workplace Pension Reforms: Baseline Evaluation Report