With automatic pension enrolment almost upon us, Ian Price highlights his concerns about its potential impact.
I've been lucky enough to have worked within the pension industry for more than 30 years. If I look back at all of the legislation changes that have taken place over that time, it is actually quite scary.
To me, what is interesting is that change continues at great speed. The one change on which my mind is focusing at the moment is the introduction of auto-enrolment, along with the launch of the National Employment Savings Trust (NEST).
Within my role, I am fortunate enough to travel up and down the country talking to clients. It is very clear the interest in auto-enrolment and NEST is increasing.
Like everyone else, I agree that increasing retirement provision is important, but I am becoming more concerned about what the real impact of auto-enrolment will be.
Help or a hindrance?
Let me explain: there have been a lot of individuals within parliament and the industry that believe the employer is the gatekeeper to retirement provision for their staff.
I am afraid that the business owners I meet - ranging from small five-man businesses right up to those who employ hundreds of staff - do not believe this and do not want to play this role.
Their objectives are simple: to make sure their business survives in what is a really difficult economic period. This includes making sure their employees have a job and are paid a realistic level of remuneration for the work they do.
Many employers see the arrival of auto-enrolment as yet more red tape, which then gets in the way of them running their businesses.
It is clear that having different staging dates and a phased level of contributions will help a lot of employers, but they are all really nervous about what the impact of auto-enrolment will mean to their business.
When you actually explain the process of auto-enrolment and the fact this has to be repeated every three years, they are absolutely amazed and worried about how they will be able to cope with the administrative burden.
The industry is beginning to adapt to these changes and introduce alternative solutions. However, I still believe that for smaller employers who do not have an existing arrangement, the likely solution for them will be NEST.
This brings me to the area that I feel still needs to be resolved: qualifying workplace pension schemes. It is clear from conversations that I have with product providers they are not yet in a position to say which of their schemes they will allow to become qualifying workplace pension schemes.
This is fully understandable. If they are running a scheme at the moment with, for example, 200 members, but have to auto-enrol another 200 employees that are lower paid and have higher levels of turnover, this could have a significant impact on the profitability of the scheme.
What I believe will happen next year is that the product providers of group schemes will look at schemes on an individual basis to decide if they will allow them to become qualifying workplace pension schemes.
But as mentioned earlier, NEST is likely to be the only realistic option. I do not see product providers wanting to establish a scheme for small numbers of members where they do not know how many are actually remaining members rather than immediately opting out. It is vital we start talking to all employers so they obtain an idea of what auto-enrolment will mean to them.
As we all know, pensions minister Steve Webb really does not like ‘active member discounts'. We need to understand what this means going forward with regards to qualifying workplace pension schemes.
The fact that legislation may or may not be enacted to prevent schemes offering active members discounts from being treated as qualifying workplace pension schemes merely adds to the uncertainty.
The charity case
I have also been lucky enough to talk to a number of charities about the impact of auto-enrolment. It is also very clear that they, particularly, are worried about what this will mean to their organisations.
Charities survive on raising money and at a time when the task of this is difficult, they are concerned that these changes will affect the help they can provide. If they cannot raise money to cover the extra cost, the only option they have is reduce the number of staff.
It will be interesting to see just how many people remain as members following auto-enrolment. We have to look at the positives. Any employee who starts to fund retirement has to be good news, but I fear the opt-out rate will be significant.
Auto-enrolment is generating many opportunities for us to talk to those individuals who are running businesses. We are going to be very busy over the next couple of years here.
Ian Price is divisional director - pensions at St James's Place
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