It is not just the Olympics that will be bringing obstacles to overcome, hurdles to leap and targets to be beaten in 2012. The retirement benefits industry will face its own Olympian challenge this year too.
With scheme sponsors, scheme advisers and even an increasingly clued up general public looking on, ensuring auto-enrolment is introduced as smoothly as possible will be crucial.
The principle of auto-enrolment was proposed by the Pension Commission's first report in 2004. The fact that it has required this long a lead time – and there is still much tinkering at the smaller end of the market – shows how complex, emotive and challenging a subject it is.
What makes 'auto-enrolment' fundamentally different to previous initiatives, like stakeholder pensions for example, is the sheer scale and complexity of the project. It is widely expected to bring seven million plus individuals and more than one million employers into contact with pensions for the first time. Employers will need to make crucial strategic decisions, the most critical being whether to use one of the new auto-enrolment schemes, implement a new scheme of their own, or to adapt an existing arrangement.
In all cases, the impact upon systems, payroll, HR, communications (to name just a few) will be huge. Of course, auto-enrolment is being phased in over a five-year period with various staging posts depending on the size of the company, but will all employers be ready by their staging date? Larger companies will be fairly au fait with the new requirements, however the smaller in size the company, the less likely it is that they will be ready for the challenges ahead. With payroll and administration systems requiring an 18 month preparation and testing time on average, it is not leaving much time to prepare.
The Pensions Management Institute (PMI) has recognised that to help those charged with getting to grips with auto-enrolment, a better understanding of UK pensions issues is needed. In response, it has introduced two qualifications. The first is the Retirement Provision Certificate (RPC) which then leads into the Diploma in Employee Benefits and Retirement Savings (DEBRS).
Both are designed to make it easier to understand pensions for 'non-pension' people. We see the role of the PMI as educating those charged by their companies with implementing one of the most challenging initiatives of the past decade.
At the heart of the issue is getting people to understand money and managing their finances. More and more people feel that financial education needs to begin at school for it to have any chance of changing our national psyche. It does not help when so many young people are saddled with large debts from university which may take decades to pay off. Add to that the enormous hurdle of buying their first home; the cost of raising a family; increasing costs of getting their own children through university. How on earth are you meant to fit saving for retirement into all that?
It is incredibly tough and there are no easy answers. Nevertheless, with retirement at 65 and longevity reaching the mid to late 80s, we can look forward (if that's the right term) to spending a third of our lives in retirement. Everyone needs to understand the need to start planning for this earlier.
However, many lack the finance/knowledge/impetus to make it happen. Somehow, people have got to be incentivised to save for their retirement more than is the case at the moment. That might be something that will take a long time to realise but certain thoughts (dreams) here include:
- A system that allows people to consolidate the numerous small pensions pots that people accumulate in their working lives into one so that people can better understand what they have got to invest.
- The financial services industry to be much more transparent in its pricing structure so that people can see how much they pay in charges and to stop hiding behind the 'small print' as much as it has done in the past. This may help restore public confidence.
- An awareness on the part of the individual that he/she will need to be more self-reliant in the future – there is less paternalism out there - coupled with an understanding about the impact of timing and amount of contributions, investment choices, and open market options. Auto-enrolment, if not a solution in itself, is at least a step in the right direction.
The last few decades has seen massive changes in the way that people manage their working lives.These changes have been complicated by dramatic improvements in longevity. As a society, we have yet to come to terms with these changes and how we might more effectively plan our retirement. This remains the most difficult hurdle of all, and is the challenge which will make the greatest demands of our industry.
