 By Martin Palmer, Corporate Benefits Marketing at Friends Life
The FSA’s Retail Distribution Review (RDR), implemented as of 1st January 2013, is perhaps the most wide-ranging piece of reform and has a number of implications for advisers and product providers alike, with the over-arching purpose of improving transparency for the consumer. Whilst there are concerns across the industry around some specifics, we at Friends Life are doing all we can to keep our proposition as simple as possible and are looking to ensure as smooth a transition into the post-RDR world, both for our customers and the advisers we work with.
In pensions especially, we face a more imminent and equally momentous change to the regulatory landscape with the onset of auto-enrolment, undoubtedly a landmark moment for workplace pension saving. The government has outlined the long-term impacts of this legislation, with DWP research estimating that auto-enrolment will almost double weekly retirement income to between £153-£195 by 2070 – without doubt a step change in the way we save for our futures.
The importance of this initiative is highlighted by a recent survey conducted here at Friends Life which explored the public’s expectations for retirement. The findings demonstrated the clear disconnect between what we aspire to for our retirement and what our pension savings can actually realise. The figures revealed that over 89% of respondents want to retire at 65 or before, but that just 54% felt they would be able to given their current level of pension saving.
The research also indicated that good pension intentions are often marginalised by other concerns; over 72% felt they should start saving for their pensions before reaching 30, but only 56% of over 30s actually did.
Startling statistics such as these that emphasise the need for greater education amongst consumers but equally important is what auto-enrolment means for employers?
The legislation starts to come into effect from next month, with the largest employers beginning their duties first. Businesses will need to have the necessary systems and processes in place for when their companies must begin automatic enrolment. This will inevitably mean change – in many cases significant change.
A number of firms still need to get clarity on when they will be affected, which varies depending on the number of workers you have – this will be staggered between October 2012 and April 2017. Staging will run broadly from the largest to the smallest Pay As You Earn (PAYE) schemes, although for more complex corporate or group structures further conditions apply.
The new regulations place a not insignificant burden on companies so as to comply with the legislation. Schemes may be occupational or personal pension schemes, providing they already meet, or can be adjusted to meet, the minimum requirements in terms of contribution levels for a Defined Contribution (DC) scheme, or level of benefit for a Defined Benefit (DB) scheme.
Those with DC schemes will need to ensure they have a default fund in place for workers who do not make their own investment decision around the level of risk they would like in their pension fund. The default funds will be expected to meet a stringent set of requirements and details have to be provided to the scheme members.
Given these various requirements being placed on the employer, there are a number of costs involved in setting up automatic enrolment. These include the costs of making changes to systems, as well as the additional administrative resource necessary to comply with the requirements.
Arguably more important than the initial preparations is the need for employers to recognise that this is not a ‘one-off’ exercise. Auto enrolment will mean there is an ongoing requirement to review new joiners and keep clear records of all decisions and transactions in relation to the pension schemes. In addition it is important to ensure that the employees take an interest in their pension and appreciate the value of the contributions that they are paying in as well as what the employer is paying in on their behalf.
What is abundantly clear is that the fourth quarter is going to be far from quiet for those in the field of pensions, and financial services more widely. The preparation for regulatory change is, in 99.9% of cases, only the beginning and it is only post-implementation that a number of issues will need to be ironed out, across the various initiatives currently in train.
Fingers crossed in a few decades time we’ll see the benefits of all the hard work!
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