There’s been some press interest recently as to whether employers with work-based pension schemes should start auto-enrolling employees into their schemes ahead of 2012. Some commentators say that they should – perhaps to spread the cost and administration burden of autoenrolment over several years and get the process embedded in good time for 2012. I’m not so sure.
Historically, employers have been the main drivers of private pension provision in the UK. To their credit, UK employers have been instrumental in the build up of the largest private pension pot by far in Europe. This has been entirely voluntary and at least partly because they feel it’s good to help provide a decent pension for their employees.
With the exception of Stakeholder, employers have always had a choice as to whether or not to set up a scheme, and what type of scheme to set up.
However, when Personal Accounts come along, employers may no longer feel it’s desirable to provide a good work-based pension scheme – simply because, at a practical level, they may no longer have that choice. Take, for example, an employer who has already set up a Group Personal Pension for a group of their most valued employees and a Stakeholder scheme for the balance.
In 2012, assuming the employer wants to continue the Group PP for valued staff, a choice will have to be made about those employees who are currently offered the Stakeholder scheme. Either the employer auto-enrols them in the Group PP or Stakeholder, or in a newly set up alternative scheme, or they simply use the Personal Accounts default.
The problem with offering the wider group of employees membership of the Group PP is that this could have a negative effect on the cost of benefits for individual employees. Providers often price schemes on factors such as the financial strength of the employer, premium income and expected (or historic) staff turnover rates. So, for example, if lower paid employees are more mobile, the valued employees may end up paying more in charges than they currently do.
Setting up auto-enrolment for the existing Stakeholder will mean additional cost for the employer – for example the cost of communicating the change to members and amending payroll systems. Setting up a new scheme may be expensive for the members due to the pricing reasons already mentioned. So it’s not hard to see why, for the “less valued” employees, the Personal Accounts default could often be the most attractive option.
All this assumes that the legislation in 2012 will allow employers to choose who should be offered membership of any alternative scheme to Personal Accounts. It’s not yet clear if this will be the case or, indeed, if anyone has actually seriously thought about this.
Even although the details about how exactly Personal Accounts and auto-enrolment will work are still some way off, now is the time that advisers should be talking to employers. It’s important to get a handle on how employers will react to Personal Accounts. The first question to ask is, will they keep any existing schemes running? If so, what will they look like? Will they just be for the most valued employees, or for all employees? Astute advisers will be asking these questions to help add value to their advice to employers in the run up to 2012.
After all, it is the answers to these questions that could determine the success or otherwise of Personal Accounts, and the very future of UK private pension provision. Employers remain at the forefront of these issues. We should be talking to them, and listening carefully to what they have to say.