25th September 2013
There has been some marvelous headlines about the Government’s workplace pension reforms known as auto-enrolment as it comes up to its first anniversary. Some 1.6m people are now in a pension who were not before. These numbers suggest that the reform – promoted by businessman Theo Paphitis on an advertising hoarding near you – has made a big difference. And yet it is early days.
Although the big reform kicked off just about a year ago – because it is being rolled out by employer size, there are still many millions of employees working for hundreds of thousands of employers to be enrolled.
The big debate about what constitutes success has usually revolved around the number of employees who decide to opt out. Under the new system you are joined up automatically, then you pay contributions into a pension (and receive employer contributions) unless you specifically decide not to join. And every three years you are enrolled again and have to opt out all over again.
A remarkable sounding 90% of workers stayed in, defying predictions that the active non-joiners could be as high as 30 per cent. By the way if you are an employer struggling with costs this will put up your pension bill but more on that later.
Amid claims of success, pension firms such as Hargreaves Lansdown and Jelf make a different argument. They say the definition of an opt out may be disguising those who realise they have been opted in a few months down the line and then stop making payments. They are not counted as opt outs under the present system.
Jelf Employee Benefits pension expert Steve Herbert writes a very informative blog on auto-enrolment matters aimed at employers not employees. Here are a couple of quotes from his recent thoughts. “The largest percentage of opt outs so far has been from employees aged 50 and over. This group was showing a 25% – 50% higher opt out rate than other age groups.”
It is possible that those in this age group have decided it is simply too late, though Mindful Money would advise that they need to think long and hard about matters such as the size of the state pension and whether you can easily translate the house you own and live in into some sort of retirement income.
Back to Mr Herbert. He adds: “The DWP report makes a distinction between opt outs (those who left the pension scheme within one month of enrolment) and those who have ceased pension scheme membership in subsequent months.”
In a note issued this week, Hargreaves Lansdown’s pension expert Laith Khalaf seized on the same issue: “An individual who realises they are paying into a pension after this period, and stops contributions, does not count as an ‘opt out’, but they are still not saving into a pension”.
“To date 2,256 employers have automatically enrolled 1.6 million workers. But 2.5 million people who work for those companies aren’t in a pension and haven’t been automatically enrolled. This is because they are too old (over State Pension Age), too young (under 22) or don’t earn enough to qualify (less than £9,440 per annum). Many will be part-time female workers. Those who can afford to save because they have a number of part-time jobs, or have a higher earning spouse, should consider opting in”.
“These firms have fewer HR resources to deal with auto-enrolment, which increases the risk of non-compliance. Indeed the Pensions Regulator has already launched 89 investigations into possible non-compliance by large companies. What’s more, recent research suggests a third of SMEs do not intend to comply with auto-enrolment legislation.
“Small and medium-sized companies should heed the cub scout motto here: be prepared. Leaving things to the last minute can lead to unsatisfactory pension arrangements, and potentially mistakes which trigger action from the regulator. We suggest employers should budget at least 6 months before their staging date to prepare for auto-enrolment.”
And here are a couple of final thoughts from Mindful Money which the pension experts have been too tactful to mention. If you are an employer and the numbers of opt outs whatever way they are measured are high, then it means your contribution bill will be lower too. Yet it is illegal to actively encourage that decision. Whatever happens the compliance costs are likely to be high, but the costs of not complying are much more.
Millions have been left behind by automatic enrolment
Some other useful facts.
|Employers who have auto-enrolled||2,256|
|Employers staging Jan-July 2014||29,000|
|Auto-enrolled workers to date||1.6 million|
|Opt out rate||9% DWP|
|Pensions Regulator investigations||89|
|Pensions Regulator warning letters||38 Corporate Adviser|
|Pensions Regulator compliance notices||1 Ibid|
|Estimated set up costs for all employers||£15.4bn Centre for Economic and Business Research|