A major survey report on pension trends in smaller firms with 249 or fewer employees has found that in excess of 9 out of 10 employers who have not yet reached their ‘staging date’ want the process delayed until pending regulation and/or legislation on greater pension flexibility, new pension options and charges has been completed. The survey report also questions whether the auto-enrolment of employees working in ¾ million micro employers (1-4 employees), commencing from June 2015, where earnings are below average, should go ahead as planned without changes to the auto-enrolment trigger and/or new financial incentives.
The survey found 62% of employers with 10 or more employees are now clear about when they must auto-enrol eligible employees into a workplace pension, but only 46% of those with 9 or fewer employees have identified the date. And, whilst the 43% of employers with 10 or more employees who are budgeting for the cost of auto-enrolment are doing so estimating employee opt-out rates of typically 1-10%, the 29% of employers with 9 or fewer employees who are budgeting are typically expecting opt-outs to be considerably higher, between 16-20% of employees.
These are a few of the main findings of Time for a reality check?, the preliminary report of the ACA 2014 Smaller Firms’ Pensions Survey conducted by the Association of Consulting Actuaries (ACA).
Other key findings include:
- Close to six out of ten of these smaller employers are supportive of the new ‘freedom and choice’ reforms, with just one in ten opposed.
- Where employers have taken a view, ‘face-to-face’ meetings are seen as likely to be the most popular channel for the ‘guidance guarantee’, followed by web-based tools and then telephone guidance.
- 56% of employers support further changes whereby current levels of pension tax relief are more targeted on those with lower incomes, with over a third also saying that reliefs should be further restricted for those on higher incomes.
Employers that have already auto-enrolled employees into a workplace pension (43% of respondents)
- 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.
- 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.
- The biggest problem experienced by employers in preparing for auto-enrolment was the ‘processes in preparing for change’ followed by ‘regulatory complexity’ and ‘assessment of the options available’.
- The median opt-out level of employees from auto-enrolment reported to the survey falls in the 11-15% band.
- The prime reason given by employers as to why employees opt-out was ‘prefer to spend income’, with this running ahead of ‘cost-cannot afford’. Disappointingly, ‘disillusionment with pensions’ was seen as the third most important reason.
Employers who have not yet reached the date when they must auto-enrol (57% of respondents)
- Whilst there is some evidence of multi-employer arrangements being established ahead of staging dates, the majority of employers presently provide no pension arrangements at all. Where schemes are present, contract DC arrangements outnumber trust-based DC arrangements.
- Awareness of staging dates (46% of firms are aware) and budgeting for auto-enrolment (29% are doing so) is still quite low.
- Where small and micro employers 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%.
- Whilst ‘small’ employers (10-49 employees) are estimating low employee opt-out rates of up to 10%, ‘small’ employers (5-9 employees) and ‘micro’ employers (1-4 employees) are expecting higher opt-out rates in the 16-20% band.
- Upwards of nine out of ten of these employers feel that a delay or pause in staging should be considered until the raft of pension reforms that are unresolved is finalised.
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 14.4 million people – well over half of the UK’s private sector employees (59% of total) and generate around a half of all private sector turnover (48%), amounting to £1,600 billion per year. They make up 99.9% of all private sector enterprises.
At present, three-quarters of the UK’s smaller employers offer no pension scheme, but all will be required to auto-enrol their employees (those who are ‘eligible jobholders’) into an ‘auto-enrolment scheme’[2] under the Government’s pension reforms between 2014 and 2017 – with tens of thousands of newer firms auto-enrolling into early 2018. Minimum pension contributions are being phased in, but by October 2018 these contributions must be the equivalent of 8% of employee ‘band earnings’[3], with a minimum of 3% from the employer plus 4% from the employee (and 1% by way of tax relief). All ‘eligible jobholders’ will first be auto-enrolled, but have the right to opt-out, which also removes the employer’s need to contribute. Those that opt-out will then be re-enrolled in 3 years’ time.
Commenting on the survey results, ACA Chairman, David Fairs said:
“To date, auto-enrolment has been a success, boosting the numbers covered by workplace pensions in 34,000 mid-sized and large employers by over 4.7 million people.
“But in a 3-year period from the middle of this year, over 1 million small employers will have to meet the auto-enrolment challenge, three-quarters with 4 or fewer employees.
“Yes, it is right that pension provision should be available to employees in even the smallest firms, but with so many pension reforms being squeezed into a short time-frame, it cannot be surprising that smaller employers are calling for a delay in auto-enrolment.
“Aside from the pressures being placed on both pension providers and advisers over such a short timescale, it also has to be remembered that, unlike larger employers who are currently required to pay less than 1% of earnings each, most small employers will have to find 3% of band earnings and their employees 4% within two years of auto-enrolling – at a time when average pay increases are likely to be well below these figures.
“We believe that there could be some sense in pausing the dates when employers with fewer than 50 employees are due to auto-enrol – namely those due to auto-enrol from 1 June 2015 onwards. This would give all of the political parties the opportunity in the run-up to the General Election to outline what financial measures they are proposing so the scheduled higher minimum pension contributions from October 2018 do not undermine take-up or, worse still, employment levels.
“The DWP published a consultation paper last week, which explores a number of options in respect of the auto-enrolment thresholds[4]. Already, 4.7 million employees have missed out on auto-enrolment, many because their income from an employment falls below the current earnings trigger of £10,000pa. This is equivalent to the number of employees that have been auto-enrolled into schemes. Unless there are some changes to these rules – particularly if the parties vie over commitments to considerably increase the personal allowance – we could see perhaps upwards of 6 to 7 million employees and rising who miss out on auto-enrolment in this first wave. Our survey report points out that this issue is compounded by the fact that average earnings of employees working for micro employers are lower than in larger firms, so without some policy adjustments the huge process of requiring ¾ million of these small employers may deliver a disappointing number of new members. The DWP needs to consider employee earnings at small and micro employers as part of its review this year and going forward”.
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