By David White, Managing Director of Creative Auto Enrolment
It has been a busy year for the pensions market. Not only have we seen thousands of businesses stage for auto enrolment, we’ve also seen pensions come to the forefront of national debate.
Since October 2012, when the first employers staged for auto enrolment, we have seen at least ten changes, or proposed changes, to pensions; from the scrapping of compulsory annuities to the reduction of the lifetime and annual allowances. Although these changes are designed to be improvements, they betray contradictory approaches at the heart of government and often ignore the most important issue – helping employers to make auto enrolment a success. What started as a simple idea is becoming increasingly complicated and uncertain.
Auto enrolment is the new flagship approach to tackling this country’s savings gap and it is vital to deal with the woefully small pension pots retirees currently face. The median average pension pot sits at just £20,000 – that’s less than the average annual salary, yet it is supposed to pay for an entire retirement. People just aren’t saving enough for retirement – that is the crux of the issue and making auto enrolment work is therefore crucial if we want to move towards living comfortably in our old age.
It was never going to be easy to get every employer in the UK to enrol all of their eligible employees into a pension scheme, and understandably it has been a bit of a rollercoaster ride so far. At the start of June we saw the three millionth person automatically enrolled into a pension scheme – a milestone for the Government’s campaign and a triumph for the big businesses who made it happen.
However, it is no easy feat to get auto enrolment up and running and it’s clear that many businesses are struggling. The Pensions Regulator had investigated 590 instances of non-compliance by the start of March and of the 22,940 companies that had reached their staging dates by the end of May, only 15,099 have registered with The Pensions Regulator to confirm that they are compliant. Figures from Aviva suggest that 25-30% of those with staging dates in April and May have yet to even choose a pension.
With the legislation proving to be an uphill challenge for businesses to implement, one would expect the government to be fully focused on helping them get it right. So why have we seen so many tweaks and changes to how pensions operate in the UK?
Back in March we heard about the new price cap on pension charges, following on from the Department for Work and Pensions’ consultation into charges on workplace pension schemes. From April 2015 a 0.75% cap on charges will be introduced for the default funds of all qualifying schemes. This took the industry completely by surprise and did nothing to remove confusion from the market.
Within the price cap, many different charging structures are still available, and while the theoretical maximum charge may be fixed, in the real world the effective costs to employers and employees still vary wildly. Choosing a pension provider and plan for employees was recently cited as the biggest auto enrolment worry for employers and the price cap has done little to help businesses struggling to make like-for-like comparisons between schemes.
This year we’ve also seen conflicting proposals when it comes to auto enrolment eligibility. In the Budget we heard that the personal allowance will increase to £10,500 a year. If the personal allowance remains linked to auto-enrolment eligibility, it means that some workers who are currently eligible for auto enrolment will no longer fit the criteria. However just a few weeks ago, Labour announced its proposals to lower the earning threshold for auto enrolment from £10,000 to £5,772 – significantly below the state pension minimum income guarantee.
Around the same time, the Centre for Policy Studies published a report recommending a change in taxation structure to a high flat rate of tax relief with a cap. Pensions Minister Steve Webb responded by informing us he is considering an uncapped flat rate of tax relief at a lower level. This comes hot on the heels of years of reductions in annual and lifetime allowances.
There seems to be no political consensus on even basic issues like whether the government should be using policy to encourage or discourage people to build up adequate pension pots, or which people. It means it is open season for any political party or commentator to suggest changes – any of which, it seems, can be adopted with no warning. How are actuaries, the finance community and business leaders supposed to plan ahead and set their strategy?
The Queen’s speech, which took place on 4th June, brought the latest in the string of unexpected pension reforms that we’ve seen this year. Employers who are already struggling to choose a pension scheme are now being asked to consider the merits of CDCs, or Collective Defined Contribution schemes (basically a new name for with profits funds).
There is nothing wrong with encouraging innovation, but how can anyone – adviser, provider, employer - build a working solution when the goalposts keep moving? Auto enrolment legislation was years in the making, and for good reason. Continual changes and tweaks to the legislation mean that none are given time to bed in before the next change is announced. This just adds another layer of complexity to the world of pensions, disengaging the business community and complicating matters for finance professionals trying to keep up with the latest developments and advise clients accordingly.
There is a danger that we are dooming auto enrolment to failure, with only the largest employers backing it and even providers being driven out of the market instead of innovating. We need to help the finance community, employers and the rest of the pensions industry get to grips with auto enrolment and give it a fighting chance of success.
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