Financial professionals are finding themselves in the unaccustomed and, frankly, bemusing position of dealing with a Government initiative which actually appears to be achieving what it set out to do.
People who are used to coping with the law of unintended consequences, which usually attends legislative manoeuvring in the UK, are looking at the first reports coming in about pension auto-enrolment and seeing take-up rates in excess of 90%.
This is well in excess of the government’s own estimations, which were in the region of 75%, and it would appear that the great mass of people who hitherto have made no pension provision are enthusiastically embracing the concept of compulsion.
Auto-enrolment is in itself a very simple idea designed to dramatically increase the numbers of workers with a personal, as well as a State, pension. All employees are automatically enlisted in a scheme by their employer, with the right to opt out shortly afterwards if they so desire.
The fact that so many are choosing to remain could have many explanations. As in inertia selling, perhaps some employees just won’t make the effort to opt out; in the initial stages, the cost is low – just 1% of salary; and so far only the UK’s bigger companies have been affected.
These companies – the Tescos and Marks of this world – already have comprehensive infrastructures in place to deal with the needs and requirements of their huge workforces: finance departments, HR departments, compliance departments and strong existing links to traditional pensions providers.
In most cases, workers within the larger companies will already be in contributory pension schemes and auto-enrolment will just be scooping up the anomalies around the edges, so the optimistic figures could be a case of low-hanging fruit.
Auto-enrolment is being staged in over a period of six years, starting last October. Staging dates are based on the size of an employer’s PAYE scheme on April 1, 2012 – the more people in the PAYE scheme at that time, the earlier the staging date.
So the process is inexorably speeding up. Roughly 40,000 employers are expected to auto enrol between April and September 2014, with clear implications for the capacity of the professional services firms they will have to enlist to aid them in the process.
And though the principle of the auto-enrolment initiative is simple, one should never underestimate the ability of government to complicate things. Employees now fall into a number of different categories, with a series of exemptions, and sifting through the payroll to identify those eligible will be a time-consuming business.
Many of our clients are actively carrying out forensic reviews of their auto-enrolment obligations in light of the budgetary considerations contained in them. The management time involved is considerable and most pensions providers are recommending that companies should bargain for at least a year to ensure fully compliant implementation.
The attitude of providers is another element which could start to rock the boat as more and smaller companies put their plans in place.
Everyone remembers the previous government’s stakeholder pensions initiative and the universally sniffy response of pensions companies when they had a look at the meagre nature of the returns they were likely to receive.
There is little doubt that traditional pensions providers – the giants such as Standard Life, Legal & General, Aviva and so on – will be pleased to enrol people in their existing schemes under existing terms. How they will view the “one and one” – 1% from both employer and employee – which is on offer in the initial stages remains to be seen.
Some of the slack may well be taken up by the providers which have been established specifically to service the auto-enrolment niche, such as Nest, People’s Pensions and Now Pensions – the last a Danish outfit which has been providing this sort of scheme in Denmark for the past 25 years.
However it continues to pan out, the imperative for employers is to give themselves plenty of time. There is going to be overwhelming demand next year on professional services and the penalties for not acting are to severe for companies to allow themselves to be caught out.
Colin Rodger is a director of Alexander Sloan Financial Planning Limited.
For further information, contact Colin Rodger at Alexander Sloan, 38 Cadogan Street, Glasgow G2 7HF, Scotland. T: 0141 204 8989. F: 0141 248 9931. W: www.alexandersloan.co.uk.