A survey report into pension savings in smaller employers (those employing 1-249 employees) has today called on the incoming Government to undertake a review of the pension auto-enrolment policy immediately after this May’s General Election to assess whether some enhancements are needed so employers and employees can meet the sharp cost of increases in minimum pension contributions from October 2017. The report, conducted by the Association of Consulting Actuaries (ACA), is fearful that low earnings in small firms could cause financial difficulties for firms, with employee opt-outs also rising markedly when minimum auto-enrolment contributions increase from 2% of band earnings[1] to 5% in 2017 and 8% a year later.
The ACA report found that most smaller employers are joining up those previously not in pensions – the majority – on auto-enrolment into either NEST or other multi-employer arrangements at the minimum or close to the minimum employer contribution (1% of band earnings) with employees also contributing at these low levels. Whilst DWP research points to similar findings at larger employers, the ACA is concerned that the challenge for smaller employers – where over 1 million have yet to auto-enrol their employees – is particularly great due to low earnings in the sector and the short period many firms and employees will have between auto-enrolling employees in 2015 and 2016 and the big hikes in minimum contributions set for October 2017 and 2018.
The report notes that although over 37,000 larger employers have auto-enrolled around 5 million new employees into pensions, still well over 1 million smaller firms with over 7 million employees have yet to reach the date when they must auto-enrol their staff. Most will not do so until 2016/17. These figures exclude new firms started from 2012 onwards who are due to auto-enrol from April 2017. In 2013 alone, 66,000 employing businesses were set up.
The ACA is opposed to pension tax reforms that reduce the overall relief given, but accepts that some re-targeting should be considered. In their report, the ACA has put down a marker that if the party or parties forming the next Government decide to make further reforms to pension tax relief, they should consider earmarking some of the changes made to national insurance reductions for example by raising the NIC threshold.
Separately, the ACA is also near to publishing a paper suggesting radical reform of the ‘broken’ pension taxation regime as a whole, which successive Governments have meddled with over the last decade or so to the point where few understand the regime’s complexity.
Key findings of the ACA 2014 Smaller Firms Pension Survey report are:
Low pension contributions are a feature of those newly enrolled into workplace pensions
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For those newly auto-enrolled into pensions, the median employer contributions is between 1-3% of earnings with employee contributions generally at an even lower level, between 1-2% of earnings.
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Those previously enrolled into pension schemes ahead of auto-enrolment (a minority in smaller employers) have generally retained median employer contributions of 4-5% of earnings with employee contributions of 3-4% of earnings.
Employers who have already auto-enrolled employees into a workplace pension (43% of respondents)
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Whilst 56% of the employers with pre-existing schemes have kept those arrangements for existing employees, generally non-joiners and new entrants have been enrolled into multi-employer arrangements, including NEST.
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Some 15% of employers have closed their pre-existing pension arrangements, with over eight out of ten of these opting to enrol all their employees into a multi-employer arrangement, including NEST.
Employers who have not yet reached the date when they must auto-enrol (57% of respondents, including 4% ‘don’t knows’)
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Where small and micro employers (1-4 employees) have made decisions (most have not) by far the majority have decided to enrol all eligible jobholders into NEST or another multi-employer scheme. Amongst those employing 10-49 employees, 57% are proposing this route; amongst those with 1-9 employees, the figure reaches 70%.
Pooling risk and new collective arrangements
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14% of larger employers (150-249 employees) show some interest in the longer-term in new risk-pooling and collective arrangements that are being introduced by way of the 2014/15 Pension Schemes Bill, but none are interested in the near-term probably due to the recent auto-enrolment of employees into ‘traditional’ DC.
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Close to one in ten smaller employers who have not yet staged are showing an interest in new types of collective arrangements, but it remains unclear whether any such schemes will be a realistic option in time for their staging.
A summary of other findings featured in the preliminary survey report which focused on auto-enrolment opt-out rates, readiness for auto-enrolment, views on ‘freedom and choice’ and changes in retirement ages are detailed in the appendix to this release.
The ACA survey gathered responses from 414 smaller employers with 249 or fewer employees. There are over 1.2 million of these smaller employers. They employ 15.2 million people – well over half of the UK’s private sector employees (60% of total) and generate around a half of all private sector turnover (47%), amounting to £1,600 billion per year. They make up 99.9% of all private sector enterprises.
Commenting on the survey results, ACA Chairman, David Fairs said:
“Whilst, in the longer-term the ACA is of the view that average pension and savings rates must increase so more people enjoy a comfortable income in part or full retirement – and hence we support such initiatives as auto-escalation and extension of contributions to all earnings up to a ceiling – in the near-term Government may need to be pragmatic and consider some targeted financial incentives to help deliver the desired policy outcome of wider and deeper pension coverage in smaller firms.”
The ACA 2014 Smaller Firms’ Pensions Survey final report, including a statistical appendix, is available at www.aca.org.uk (see: ‘recent publications’ page or ‘research and surveys’ page)
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