The government should try frightening employees and employers into embracing auto-enrolment reforms, the chairman of the Association of Consulting Actuaries (ACA) has told Pension Funds Insider

Speaking as the results of their 2011 Pension Trends Survey were published, Stuart Southall said "it's better to frighten and educate people into pension saving than allow them to face the nasty surprise of retiring into financial insecurity on an inadequate pension pot."

Southall warned that "the vast majority of private sector workers are saving nowhere near enough for retirement and although it's frightening when people see the figures, I don't feel this fact is fully understood."

The ACA survey suggested that close to a third of employers with more than 250 employees will be looking to review their existing pension arrangements in order to mitigate the added costs of auto-enrolling their entire workforce in an occupational pension.

Southall argued that "the policymakers seem to be in denial on this, but in the current challenging financial circumstances it is inevitable that private sector employers, instead of increasing the size of their pensions cake, will be keeping it at the same size but dividing it into smaller pieces".

However, he claims that "policymakers seem to be in denial on this" and expressed concern that there was not wider recognition of the degrading of workplace pensions saying: "The Department of Work and Pensions often say they can see no evidence of 'levelling-down' in the private sector while being complicit in what many see as a more necessary 'levelling-down' in the public sector."

The ACA's pessimistic outlook on auto-enrolment has led to them repeating calls to examine risk-sharing hybrid pension schemes to boost pensions and compensate for the great shift out of defined benefit (DB) schemes to defined contribution (DC) schemes.

Southall told Pension Funds Insider that "the government only pays lip service to the problem of employers shifting the pension burden onto employees and is not prepared to do anything in the middle ground. This is despite promising in the coalition agreement to reinvigorate occupational pension saving and the government can try to reengage with employers to offer pension arrangements that have a sensible balance of risk".

Awareness

The ACA survey suggests there is widespread ignorance of the new legislation amongst smaller employers. It claims that some two-thirds of employers currently not offering a pension have no intention to auto-enrol employees in the government backed NEST scheme or an employer's scheme despite them being legally compelled to do this by 2017 when the reforms have been fully phased in.

David Marlow, development manager at Creative Benefits, is another commentator who doubts the ability of the auto-enrolment reforms to offer a magic bullet in combating employer scepticism on pension provision.

He told Pension Funds Insider that "it's clearly a tough time for employers to swallow an extra cost. Those that are onside will continue to appreciate the benefit in helping staff to a better retirement, but companies that are not convinced of the value of offering pensions today are unlikely to change their view with compulsion."

Marlow warned that "it's likely that those employers will have even more resistance as they are being ordered to do something they don't want to." On the other hand he claimed that he has not seen from his own firm's client base "the same intent to level down, with most employers making a strong commitment to maintain current pension provision whilst anticipating extra costs."

Marlow admitted that his firm "would recommend that employees opt out of a pension after being automatically enrolled if we don't think it's suitable for them. There are sound financial planning reasons for opting out, for example individuals who have large credit card debts."

Marlow criticised the government's plans to reform the state pension after auto-enrolment is introduced for creating uncertainty for the private pension reforms. He said: "Although the government has committed to changing the basic state pension and removing means testing, it hasn't done it yet. This mismatch of timing and an outside chance that the state pension reform won't happen raises difficult choices for those without a private pension currently who may be set for means-tested benefits."

The introduction of auto-enrolment does offer a unique opportunity for employees to engage with pensions though, says Marlow. He admitted that there is a "vital need" for this on the basis of recent results from a survey on auto-enrolment from the Chartered Institute of Personnel and Development (CIPD), which indicated that the majority of workers do not know about the reforms.

Marlow warned though that "if an employer's motive is only complying with the law then extensive engagement is unlikely to be attractive to them as they only want to avoid being fined."

Gearing up

The need for pension schemes to shift their planning for the changes up a gear was highlighted by another survey, from Standard Life. The provider found that only 7% of larger employers have settled on firm plans for auto-enrolment.

Encouragingly for savers, while 56% of employers said there had been no decision made yet on their contribution levels for new pension scheme members after auto-enrolment, 36% of those surveyed said they would maintain current levels for new savers as opposed to just 5% who would be less generous to new members.

This challenges the ACA's theory of 'levelling down' being likely, although Jenkins points out that some of these employers could be planning to reduce contribution levels for existing members before matching the lowered level for new ones.

The most important message from the survey for Jamie Jenkins, head of corporate strategy & proposition at Standard Life, is that "many employers still have some big decisions to make. The majority of those surveyed will need to commence auto-enrolment at some point during 2013 and there is going to be a great deal of planning work that needs to be done, therefore 2012 is going to be a busy year."

Jenkins says though that levelling down may be easier to plan than to carry out, explaining that "there are complications with reducing contributions which I suggest may not have been fully though through by many employers".

He adds that "contracts of employment may well confer pension rights which would make them difficult to change. Then you have the fact that employers with more than 50 employees will have to have a formal consultation, lasting a minimum of 60 days. Unionised workforces may have a strong say in the matter too, so negotiations could be protracted."

Margaret Snowdon, OBE, new Chairman of the Pensions Administration Standards Association, has told Pension Funds Insider that the long phasing in of auto-enrolment is not entirely helpful for employers and schemes. She said that "while this helps avoid a mad dash to comply, it is confusing."

Snowdon added: "It doesn't help that the DWP is still in consultation mode on how some of the proposals will work. The easements being proposed seem to bring their own level of bureaucracy. Employers and schemes need some clarity on the detail before making fairly expensive changes to processes."

Snowdon says that the questions still being resolved are potentially significant, stating that "information on the shape of auto-enrolment is emerging and improving, but it is not yet settled, especially around areas like definition of qualifying pay and eligibility. The DWP has proposed some welcome flexibility, but the fact that we are still talking about practical improvements to help make it work is worrying when large schemes will need to be ready in a few months time."

While emphasising that the initiative on auto-enrolment needs to come from employers, Snowdon says "In reality, lots of pensions administrators (in-house and third party) have been thinking through how auto-enrolment will work and are probably much better informed than employers - all the more sense for employers and administrators to discuss the solutions."

For instance, she says that "administrators and employers will need to collaborate on the complex opting out process where an opt out form will need to be given to the employer, but can only be provided by the administrator. Employees will not understand this and will need to be helped."

Snowdon emphasises that trustees should be on hand to guide sponsoring employers ahead of the implementation process, saying that "a conversation with an informed and interested trustee, and administrator, could help employers understand auto-enrolment and what needs to be done. Having that conversation as soon as possible will be helpful."

In warning that the failure of auto-enrolment would likely bring about compulsory occupational pension saving, Snowdon added that "we should therefore all put out best foot forward and get on with it".

First published 06.09.2011

dbillingham@wilmington.co.uk