A mere thirteen years after Adair Turner’s Pensions Commission recommended that UK workers be automatically enrolled into a workplace pension, contributions will finally rise to their full level of 8 per cent of band earnings.
Shortly thereafter we will start to learn the extent to which this final hike in employer and employee contributions is going to impact opt-outs. Advisers will also be reminding their employer clients that auto-enrolment is about more than setting up schemes, and highlighting the need for meeting ongoing obligations set out by the Pensions Regulator. Where certification has been used, this includes ensuring the contribution basis remains compliant every 18 months.
Employer’s minimum contribution will rise from 2 to 3 per cent and if an employer doesn’t shoulder some or all of the contributions’ burden, that of employees’ contributions rise from 3 to 5 per cent, although that does include tax relief.
The industry faces a big challenge – communicating a significant step up in contributions, especially to employees. Corporate advisers we spoke to say they expect the increases to proceed without too much activity.
LEBC director of public policy Kay Ingram says: “Most of our schemes are ready for this increase as we have been communicating it to employers and staff for some time.
“We do not expect to see many opt out. For many employees the increase in personal contributions will be compensated for by lower deductions for income tax following the increase in the personal allowance.
“Additionally, the majority of employees see the increases as positive, nudging them to do something they need to do, which will also result in higher employer contributions.
“The majority of schemes which we advise upon include contributions from employers well above the minimum levels of auto enrolment, so it is not a big issue for employers either.”
Buck head of DC and wealth Mark Pemberthy says: “A lot of employers with pension schemes established before auto-enrolment already have contribution rate options above the 2019 phasing levels. In these instances, the employers are moving employees up to the tier which meets the new obligations. In most cases, this was signposted to employees last year at the time of the 2018 increase and they will remind employees ahead of the increase taking place in April.”
He gives the example of a certifying DC pension scheme offering matched contributions up to 5 per cent. Employees were auto-enrolled at 1 and 1 per cent up to April 2018, increased to 3 and 3 per cent in April
2018 and increasing again to 4 and 4 per cent in April 2019. Employees still have the option to opt-up to receive the 5 per cent maximum match.
He adds: “Where schemes don’t currently have 2019-compliant options available, the majority are keeping in line with the statutory amounts, although a small minority are sharing the impact and going to matched 4 per cent.”
44 Group managing director Steve Clarke says: “We’ve got quite a few clients affected and they are taking a variety of approaches. A lot depends on whether employers are at the minimum level or not. That tends to be an indicator of whether they are engaged around pensions generally.
“We have got some clients who have an existing contributions structure that now doesn’t quite meet certification. We have some on the minimum levels.
“By and large, employers in both camps want to communicate with employees and don’t want a rise to come as a complete surprise. Generally, employers think it is a positive that employees are saving more.”
Clarke is keeping the communications relatively simple.
“What we have been doing in terms of communications is a basic wage slip flyer saying ‘Don’t
forget pension contributions rises are coming’, then a reminder. Generally, those who are interested will come and ask for more information.
“The danger is you do a big hand out about the change and people gloss over it. So we distil it into very short messages.”
“With some other employers who are more engaged, we think about combining it with other messages, such as reminders about annual allowances if they have got a lot of higher paid staff.”
He says that some schemes under certification are having to examine their existing employer/employee mix.
“They may be having a debate about who pays for the extra half of a per cent i.e. whether the company picks that up. I remember a client previously saying ‘we’ll absorb that’, but the trading climate has shifted so now they are debating it. Yet even they want to ensure they communicate what is happening even if they are not quite sure what the message will be.”
Most advisers are therefore relaxed about their clients and perhaps unsurprisingly expect more opt outs from schemes where employers have sought direct solutions.
CanScot Solutions principal Robert Reid adds: “All the schemes we look after do a proper communications exercise. But where people have signed up to something where there are steps in it, where contributions escalate, you can’t presume they can all remember what was said initially. You have to tell them about the benefits all over again. In fact, it is almost like selling the scheme again.
“I think the big danger will be people going direct to big master trusts – there may be a kick back against being in the scheme when they see the contribution rise. Of course, some employers will not spend the money on the comms exercise to keep their employees in the scheme. Some smaller employers won’t do anything to keep them in and of course won’t be in any trouble. They are not actively encouraging employees to leave. But they will leave. The irony is that although contributions are going up, we all know that at 8 per cent, it is still not enough.”
Clarke says: “I have clients who want to communicate. But with those dealing direct – whether they are as engaged – I don’t know. Our clients are more likely to say you need to tell people something – Indeed, they don’t want the drop-out rate to be too high.”
“Three, four or five years down the line, they see auto-enrolment has been a good idea. It has got people to start saving. Employers have gone beyond arguments about red tape and the nanny state. They don’t complain about the cost as much and are happy to publicise it because they think people should stay in their schemes.”
He says he is surprised about the low rate of opt outs to date.
“I thought there would be a big opt rate. That was based on how hard it was to get people to go in under the old system, but inertia is a wonderful thing.”
But he says you do see a secondary wave not at the point of increase but sometimes 12 or 18 months out. “You get people asking why am I in a pension and a secondary drop-out rate, but even with that, I still think inertia is still going to rule.”
Research from Nest carried out after the first increase a year ago offers encouragement that this year’s hike will not lead to the exodus some had feared. Research of its members carried out after the April 2018 rise found just 1 in 20 thought too much of their income goes into their pension. After the increase, 28 per cent thought about increasing their contributions further, and 51 per cent of Nest members didn’t notice an increase in their contributions.
Cavendish Ware associate director Roy McLoughlin believes younger employees have a strong sense that they must make provision for retirement. He remains typically upbeat about the change.
He says: “What’s been refreshing is that when it went from one to three all the doomsday merchants were wrong. I suspect that three to five change will be the same thing.
“People have got used to this payment. I think young people in particular have got it. They understand why they have to do this. You do have to remind them how the tax relief works. It is not 5 per cent; it is 4 per cent. The key thing is reminding people how good auto-enrolment is, reminding people how tax relief works, reminding people how the concept of self-sufficiency is paramount. You tell them, you have to look after yourselves. No-one else is going to do it for you”.
DON’T FALL ITO THE EARNINGS CERTIFICATION TRAP – TIM GILLINGHAM, DIRECTOR, BENEFIZ
With the Pension Regulator increasing their activity with employer visits we recently decided to hold a workshop to help employers better understand their responsibilities. Two things became very clear.
Firstly, while employers appear to have a good basic understanding of the regulations, they rely heavily on the provider keeping suitable records. Speak to the providers and they make it very clear that they take no responsibility for compliance and employers should maintain and check their own records.
Secondly and perhaps more worryingly, explaining the subject of earnings certification to the group of employers was met by a deathly silence. All employers in the group deducted pension contributions based on basic salary. Most of our clients also adopt this approach as prior to the introduction of auto enrolment this was the preferred method. These employers have therefore not certified their earnings by either Set 1, 2 or 3 and are potentially in breach of the regulations.
We have sympathy with employers as this is a complex area and a topic that is little understood by IFAs and payroll companies, and providers offer little support. Why is this so complex?
To make matters worse, the latest case study published by the regulator (below) details a case where the employer didn’t certify correctly and was ordered to rectify the position at great expense to the employer in terms of increased contributions.
So employers need to make sure they hold adequate records in case they have a visit from the regulator – and if they haven’t done so already get a certificate to certify their earnings definition.
TPR CASE STUDY
A household name employer automatically enrolled its eligible staff into a master trust pension scheme in 2013. The scheme was ‘self-certified’ by the employer. Employers using certification to calculate contributions must re-assess their workforce every 18 months to ensure that it still meets the relevant criteria.
In 2016, the company assessed the workforce and realised that the circumstances had changed and the contributions should have been calculated in a different way (in this case, the company had originally based calculations for pensionable earnings on 85 per cent of total earnings).
The changes meant that the calculations for pensionable earnings would be based on 100 per cent of their total earnings. However, the company failed to amend its payroll or update the pension scheme rules, meaning that the pension contributions paid fell below the minimum required by law.
The employer wrote to their staff to explain they would meet the full costs of the underpaid employer contributions (over £350,000), plus an additional allowance to compensate for lost investment returns. The company got in touch with TPR in 2017 and said that there had been an oversight and they had failed to make required changes because the business was very busy. TPR was not satisfied with their explanation or proposed rectification
plan and, in April 2018, issued the company with a notice requiring them to pay the shortfall of both employer and employee contributions, adding up to a total of over £700,000. They confirmed that they had paid the outstanding amount in July 2018 and are now compliant with their automatic enrolment responsibilities.