Only 28% have budgeted to date for the cost of auto-enrolling their employees (those that are ‘eligible jobholders’) into a workplace pension scheme. Those that have budgeted expect employee opt-out rates from schemes ranging in the main between 11 – 35%, with the highest opt-out rates in the smallest firms. Fewer than 1 in 5 firms are aware of the detail of the auto-enrolment regulatory regime, guidance and employers’ duties. Of those that are aware of the regulatory regime, 53% said it appears ‘complex’ and 23% ‘very complex’.
These are a few of the main findings of A million challenges ahead, the first report of the ACA 2012 Smaller Firms’ Pensions Survey conducted by the Association of Consulting Actuaries.
Other key findings include:
- Of those firms with a current pension scheme, a half are likely to auto-enrol all employees into an existing scheme – although many more are unsure what they will do compared to 2 years ago (27% as opposed to 9%). 1 in 10 will consider auto-enrolling into a new workplace scheme with a further one in ten restricting entry and placing the balance of employees in NEST. Only 4% will close their existing scheme and place all employees in NEST.
- Over 4 out of 10 firms who presently offer no pension scheme remain unsure about what they will do when they auto-enrol employees into pensions. 38% expect to auto-enrol all employees into NEST, with 19% looking to enrol into an employer’s scheme.
The ACA survey gathered responses from 541 smaller employers with 250 or fewer employees. There are over 1.2 million of these smaller firms which employ over half of the UK’s private sector employees (59%) and generate a half of all private sector turnover (49%), amounting to £1,500 billion per year. They make up 99% of all private sector enterprises.
At present, three-quarters of the UK’s smaller firms offer no pension scheme, but all will be required to auto-enrol their employees (those who are ‘eligible jobholders’) into an ‘auto-enrolment scheme’ under the Government’s pension reforms between 2014 and 2017 – with some newer firms auto-enrolling into early 2018. Minimum pension contributions are being phased in, but by October 2018 these contributions must be 8% of employee ‘band earnings’[4], 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.
The survey also found that whilst at present these smaller firms report nine out of ten (male) employees are retiring at age 65 or younger, by 2020 two-thirds expect employees (both men and women) typically to retire at age 67 or above. By 2028, over a half expect the typical retirement age to be age 68 or older, with over a quarter retiring at age 70 or above. In short, typical retirement ages are expected to out-pace the increases in the State Pension Age.
Another finding was that even amongst these smaller firms there are clear concerns about the pension risks being shouldered by employees and their ability to cope with them. Broadly only a third of firms say individuals should shoulder all of the ‘investment’, ‘longevity’ and ‘inflation’ risks associated with pensions. Around four out of ten firms say employers should share or take on the majority of these risks.
Commenting on the survey results, ACA Chairman, Andrew Vaughan said:
“At present and through 2013 the pressures on employers are significant, but with the duties applying to larger employers in these early stages, many already used to the complexities of UK pensions, we trust the new regime will cope with the pressures.
“But in a 3-year period from mid-2014, over 1 million SMEs 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 we do question whether the auto-enrolment rules are overly complex for businesses of this size and whether the strains of the staging timetable by 2015/18 look too rigorous. We also wonder whether the pensions industry has fully taken on board how it will market appropriate pension schemes to so many SMEs, the vast majority of which have no provision in place at all at present.
“One possibility might be the establishment of an approved panel of advisers who are geared up to provide cost effective advice on auto-enrolment to SMEs.
“Let us also hope the economic situation and the public’s perception of the benefits of pension savings will improve during the staging period, otherwise the feedback from our survey suggests that concerns over both cost and disillusionment with pensions may prompt high opt-out rates.
“Our survey found many employers even in the SME sector do not feel their employees should be exposed to 100% of pension risks. Reflecting this, employers need to consider if and how they can help to share risks with employees. And Government, by removing legislative constraints, as well as those of us in the pensions industry must play our part by making sure pension designs offer effective governance, at a scale allowing members to benefit from good value and with options that mean both employers and employees have confidence in the schemes that are used and a feeling of greater certainty that the pension outcomes will be worthwhile.”
