“Ambitious” pensions can save you from staging a disaster

Organisations with 500 or more employees have been written to recently by the DWP with a reminder that in 2013 they have to “stage” auto-enrolment.

Companies which historically provide and promote pensions to their staff will take all this in their stride

But staging for some could be a disaster. If you are in the cut-throat supermaket sector and you find your staff costs going up by as much as 3% as a result of the new pension rules, you’re going to be paying a lot of attention to how the money is spent and on who.

The business of getting ready for this new regime can be tough, toughest for organisations like Tesco, Morrisons, Asda and Sainsbury’s whose workforce changes by the day (and in great numbers).

Companies  need by law  to assess their workforce , weed out the few not eligible and then make sure that the rest are in a qualifying workplace pension scheme with a slug of money funding future benefits.

Many employers will fall over with the administrative burden placed on HR and payroll, many more will find themselves funding pension schemes of staff who were too apathetic to join of their own doing and too lazy to leave. Many companies will see this as pouring money down the drain.

Staging auto-enrolment could mean staging a disaster- operationally and in terms of the competitiveness of the business.

From my experience, most employers, even the larger ones, are unaware that there is a way out of this. It’s not a loophole (I’ve been told from the horse’s mouth), it is a trade-off.

Morrisons 1980 - 2007 Logo

Morrisons 1980 – 2007 Logo (Photo credit: Wikipedia)

Agree to go an extra mile on the quality of pension scheme you offer your staff and you get an exemption on staging the auto-enrolment of  your current  eligible employees till October 2017.

What’s the definition of a “decent plan”. the DWP are currently referring to them as “defined benefit plans” and “hybrids” . They’ve recently published detailed guidance which I found very helpful (saddo that I am) . You can access it here.

One of the variants on a defined benefit plan is a “Lump Sump plan not linked to Final Salary” – or a “cash balance” plan, as it’s commonly known. One large supermarket chain, Morrisons (my favourite) has agreed to set up a cash balance plan that qualifies under the DWP rules as a workplace pension scheme (for auto-enrolment purposes). Morrisons agree to fund the Scheme to pay a lump sum to employees when they retire on a published formula- if the market goes down, Morrisons pick up the shortfall.

The Government considers this “ambitious”, Morrisons are providing a certified Defined Benefit Plan and wonder of wonders, provided they offer entrance to staff before their staging date in October- they will not have to auto-enrol their eligible workers. This is pretty cool for Morrisons who are able to publicise they have gone the extra mile and reap the reward of knowing that the people who have joined their plan- have chosen to.

The key concession that Morrisons are getting is that they can use a “transitional period” between October 2012 and October 2017 (they can even push this out to January 2018!) before they have to auto-enrol staff who have chosen not to join the defined benefit plan.

Clearly, from a cashflow point of view, Morrisons would be most happy for 0% of the 100,000 staff who would have staged in October to chose to stay out of the scheme for the next five years – happy days for the FD. However, knowing what I do, I suspect this was not the sole object of the exercise.

Morrisons have chosen instead of frog-boiling their employees into pensions, to get them pensions savvy. They have chosen to pay substantial amounts of money to get all their staff up to speed with pensions issues, which I very much applaud. Their “Save your Doough” is a great way of encouraging rather than anesthetise their staff into private pension provision.

So is this the great leap forward? I suspect that the increase of “Defined Ambition” pensions, if increase there is, will be as a result of this concession. It will not be long before the cynical call it a “loophole” and the cynical might point to the ongoing cost of providing a cash lump sum at the minimum certifiable rates as not much more than funding at the AE money purchase rates (especially if your workforce is young).

This concession does not get you out of having to auto-enrol new (eg post staging) employees into your scheme nor is it without its burden (you need actuaries crawling all over you to make sure you stay within the rules).

Nonetheless, for companies with a decent number of disinterested employees who do not look like they’ll ever benefit much from being in a pension scheme and others with the wit to appreciate a good deal when they say it, these “ambitious pensions” may be just the thing.

Certainly they deserve a lot more consideration than they are generally getting. Good on Morrisons (and Tesco) for paving the way and good on the DWP for making this important concession that could go some way to restoring a proper balance in pension risk-sharing.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in actuaries, auto-enrolment, corporate governance, dc pensions, defined aspiration, Retirement and tagged , , , , , , , . Bookmark the permalink.

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