This month the UK’s biggest employers are legally obliged to offer employees a workplace pension scheme into which they must contribute.
Auto-enrolment, one of the most radicaltenets of the Government’s programme ofpension reform, came into force on 1 October, and companies with more than 120,000employees must automatically enrol their eligible workforce into a compliant scheme.The likely success of this sweeping change is unknown but the Government has ambitions to see eight million unpensioned workers join, and ultimately stay part of, pension saving.
Initially there was widespread fear that employers would reduce existing benefit arrangements to meet the bare minimum. Levelling down, as it is known, was a real concern among unions and some pension organisations, who believed setting a statutory minimum pension obligation would undermine the more generous arrangements out there.
A good start
However, the early signs are good. Supermarket chain Morrisons, for example, offered a cash balance rather than defined contribution (DC) scheme for all permanent staff , which will match employees’ contribution and produce a guaranteed fund on retirement.
A survey of 102 directors at companies employing more than 2500 employees, published by consultant Hymans Robertson in September, found 42% of respondents would welcome an increase in pension contributions, compared to just 26% who were opposed.
Further, the latest National Association of Pension Funds (NAPF) annual survey reported just 5% of companies had plans to level down.
These initial positive indications are further supported by experiences from providers and advisers who claim they are yet to see evidence of employers actually reducing their existing provision.
Blackrock head of DC consultant relations Paul Gilbody says he has seen no instances of levelling down and has no expectation of seeing any in the future.
Meanwhile, Buck Consultants principal and head of pensions policy Kevin Le Grand says: “It is early days but our experience is that generally employers with existing arrangements are not looking to level down – quite the contrary, in fact.
“By definition these employers are converts to the pensions cause, since they have chosen to provide pensions for their employees when there was no legal requirement to do so.”
There is some evidence, however that employers are setting up a two-tier system, offering a bare minimum scheme either for certain sectors of the workforce or to those deemed disengaged from pension saving. For more ‘valued’ employees and those who see pension saving as important, there is the option to join a more generous scheme. AllianceBernstein director and head of client relations Tim Banks says he has talked with a number of employers that intend on taking this two-tier approach.
Le Grand, too, says the two-tier approach is an option for employers dealing with ‘recalcitrant’ employees, but adds: “Some of our clients are keen to increase positive engagement and are offering a last chance to the current non-joiners to join the better scheme, before the new post staging date arrangements come into force.”
Going further
The NAPF has been instrumental in driving high standards in DC provision, notably through its Pension Quality Mark (PQM), which recognises and rewards schemes for their level of governance, contributions and communication.
NAPF Pension Quality Mark (PQM) manager Alexandra Kitching says she has seen an increase in schemes improving their existing arrangements to achieve the PQM “particularly in governance, charges and communications areas”.
Kitching highlights work by miners De Beers UK which runs presentations for new employees introducing them to the pension, and has improved governance by setting up a DC sub-committee of its trustee board.
Kitching adds: “De Beers UK actively encourages members to search the open market for an annuity, and informs them of the tools available.”
Some employers are also demonstrating a willingness to off er more than pensions where employers recognise that saving for retirement may not be the primary concern for particular sectors of the workforce.
AllianceBernstein’s Banks says there has been some demand among employers for greater variety in terms of the savings products offered alongside the pension scheme – such as ISAs – and for greater integration of employee benefit portals, including flexible benefits. However, he adds: “Our sense is that in most cases the take-up rate of these features to date by employees has been minimal.”
Getting the message across
All this positivity, however, belies the indisputable gap between expected retirement outcomes and the likely reality.
The Hymans Robertson survey found that only 47% of employers set contribution rates based on a target income for employees at retirement, while just 20% would increase contribution rates if faced with evidence of poor outcomes for scheme members at retirement.
The headline-grabbing examples of companies offering more than the bare minimum cannot detract from the large number of companies that will simply not be able to keep pace.
Widespread communication and engagement is needed before there can be any hope that auto-enrolment will achieve adequate workplace pension saving on any kind of scale.
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