The one thing the Government needs to make their pensions reform agenda work is apathy.
When workers are automatically enrolled into a pension scheme from 2012, the Government is relying on people remaining members because they simply can’t be bothered to opt out.
But people will opt out. They will opt out because they feel they can’t afford to pay pension contributions. They will opt out because they don’t believe it pays for them to save in a pension. And they will opt out because the people around them influence them to do so. This could be their friends, family, or work colleagues.
The Government is worried that employers will try to pressurise or tempt their workforce to opt out by offering them ‘inducements’ – such as higher salaries or one-off bonuses. In fact, so worried, that it has introduced amendments to the Pensions Bill currently in the House of Lords to penalise employers who do exactly that.
The Pensions Regulator has been given the job of policing errant employers. Where it believes employers are falling foul of the law – by inducing their workforce to give up membership of a qualifying scheme without being an active member of another qualifying scheme – then the regulator could issue a compliance notice requiring the employer to take certain action, including making up past contributions.
Employers using ‘soft persuasion’ to encourage workers to opt out is probably one of the biggest risks to the success of pensions reform and the new employer pension responsibilities, and it’s natural the Government should seek to contain this risk. But this is going to be a tough one for the regulator to monitor. It will have to rely on people whistle-blowing when they believe their employer has done wrong, but many workers will be ignorant of their rights.
The new law may also create problems for current schemes and practices. Often, within a flex package employees can choose to give up a pension contribution for a bigger salary. Or increasingly employers are offering contributions into a cash ISA instead of a pension contribution. This offer makes financial sense particularly for younger members of staff emerging from higher education with student debt.
The principle of stopping employers offering inducements is sound. But we really need to explore exactly how it will work in practice. There is a big danger that the ‘good’ employers will be tripped up by well-intentioned legislation. We will all need to tread carefully.
Rachel Vahey is head of pensions development at AEGON
The views expressed in this article are those of its author and do not necessarily represent those of the company he represents, IFAonline or any other Incisive Media affiliated organisation.IFAonline
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