The Government officials charged with monitoring the success of auto-enrolment will no doubt be watching with interest the reported numbers enrolling into the Morrison’s and Tesco’s pension arrangements.
Both organisations have opted to provide their “eligible jobholders” with defined benefit pensions; the benefit members of Tesco’s scheme will receive will be a pension based on the average salary they earned while with the company, the Morrisons scheme provides a defined cash sum with which they can buy a pension individually. While the Tesco formula is generally reckoned to be the better,by pensions experts, it is likely that both will be perceived by staff as “good”.
The big difference in the way the schemes are presented to the unpensioned staff of these retailers is that Tescos are making membership of the scheme a condition of service while Morrisons are not.
Capita, who administrate the Morrisons scheme reported last week that some 5,000 staff had voluntarily joined the scheme in September. This is a phenomenal number and would, in normal times be hailed a great success. As many Morrison staff phone Capita’s helpline suggesting that there is a hardcore of staff interested in pensions throughout the organisation.
Tescos numbers are very different. As many as 200,000 staff will join their scheme when Tesco stages and it will be up to each member of staff to “cease membership”.
Commentators will be asking two questions. Firstly, how far will membership of the Morrisons scheme rise and how far will membership of the Tescos scheme fall.
Currently Morrisons have enrolled less tha 5% of their eligible workers (based on my assumption they have over 100,000 of such staff. The Government will be hoping that the number enrolling grows to at least 50%.
Tescos will undoubtedly see a number of staff “cease membership” but whether it reaches 50% is equally uncertain.
If the percentage of staff leaving the Tesco scheme and the percentage of Morrisons staff joining their scheme are roughly the same, Government may well feel that the auto-enrolment experiment is a waste of time. Morrisons will have proved that they have encouraged membership take-up through their Financial Education Program that “did the job”. If however September proves a spike in terms of membership and numbers of the original eligible population slows to a trickle then the Government will feel vindicated, provided that is, Tescos don’t see their scheme losing over half their members.
Capita saw the 5000 people joining as a success, but for whom? If Morrisons keep enrolments below 10%, they will be at a huge competitive advantage over Tescos in terms of pension costs, especially if leakage from the Tesco scheme is less than 50%. The impact on the relative profitability of the two companies may also be analysed by the City.
In the longer term- eg after October 2017, the “hybrid transition period” used by Morrisons runs out. Staff who did not “opt-in” or who weren’t new hires from October 2012, will be auto-enrolled for the first time. However, over the next five years, the outlook for Morrisons appears good (at the expense of the percentage of staff who chose not to join).
What Morrisons are doing is quite legal, they are using a little known concession in the auto-enrolment rules and have chosen to try to prove that with the right encouragement, staff will voluntarily join a good scheme in the sort of numbers who would remain under compulsory enrolment arrangement (with an opt-out clause).
For Morrisons it is heads we win heads we lose. A high take-up will prove they were right to make joining voluntary, a low take-up will boost their P/L.
Tescos have taken the moral high-ground. A high opt-out for them really will be a kick in the teeth for the behaviouralists who argue the power of inertia but it will be no bad thing for a supermarket currently suffering a rare poor period in profitability.
If Tescos retain a high number of staff in their scheme, it will have a meaningful impact on staff costs and thus profitability.
The stakes in this are high , not just for the members. The Government will be able to analyse the behaviour of a group of some 300,000 staff. What they will see is a massive case study for the future and a virtual referendum on private pensions.
If the results of opt-in versus opt-out are radically different, the strategic decisions taken by the management boards of the two companies will come under immense scrutiny not just from the Government but from shareholders and analysts.
Ultimately, a substantial difference in take-up may have unexpected consequences that could lead to a contraction of the labour force of the company that gets it wrong and the taking up of the slack by the company that gets it right.
Such is the impact of regulation. Such is the impact of pensions strategy.
- TESCO extra pensions (henrytapper.com)
- Auto-enrolment;- the story so far (henrytapper.com)
- Tesco falls out of favour as it languishes near bottom of survey into our favourite supermarkets (dailymail.co.uk)
- Morrisons delays start of ‘auto-enrolment’ pension scheme (telegraph.co.uk)
- Morrisons opts of of ‘auto-enrolment’ scheme (telegraph.co.uk)