Yesterday I wrote about the positives of the proposed abolition of compulsory annuitisation for the life insurers active in the UK pensions market. Today I want to share thoughts on payroll, who are always the last to be consulted and the first to be dumped on , whenever new legislation is in the offing. It won’t please my friends in payroll to hear that a lot of the heavy-lifting will be their job. But as I said at the Payroll World conference and several times on this blog, there is only so much tactical work payroll can do before they become strategic! The negative for payroll is more hard work, the positive for payroll is the opportunity to take over the pension function within the organisation. But “back to grunt” – a phrase which someone in payroll should patent – what extra work do we see coming payroll’s way? There’ll be more business as usual contribution work – there’ll be new work paying pensioners.
Business as usual
Most payroll managers have now staged auto-enrolment, if your firm hasn’t – it’s probably because you use a third party service. So most payroll managers are about to see a lot more interest from staff in pensions. Wether auto-enrolled or not, people will be picking up the message put out by PWC earlier in the week, that pensions is about to become the most efficient savings route for those in work. With this increased interest , expect to see demand to vary personal contributions, maximise efficiency by switching to salary sacrifice and plenty of one off contributions. You need rules to govern what members of your scheme can and cannot do but beware, restrictions may cause resentment in the workplace “you can’t do it because payroll can’t/won’t handle it” is not the way to improve your department’s image. As far as business as usual is concerned we expect to see progressive payrolls taking a “can do” attitude to personal contributions but expecting credit for doing so from colleagues and those at the top.
The proposals in the budget give the same freedoms to draw down money as there are to contribute it (the only cap on drawdown is that you can’t go into the red -unless a pension overdraft facility is in the super-small-print!). This is not a banking opportunity, though banks will undoubtedly think it is! We would be very surprised if we don’t see a menu of options being presented to staff as they retire.
- Buy an annuity as usual
- Drawdown from your pot at a guided rate (the Government Actuary already sets rates for each age of person.
- Drawdown at a rate set by you
- Leave the pot to roll up and take lump sums as and when
- Liberate everything day one and either buy a Lamborghini or buy to let property (or other)
L&G , who have cornered the annuity market in recent years, reckon that the numbers buying annuities will fall by 75% and as an increasing number of those retiring were putting off buying anything, this suggests that an even higher of those drawing income from April 2015 will be doing so using a guaranteed annuity.
The guided rate option has DEFAULT stamped all over it.
The drawdown at a personal rate is the smart option. Those who can be bothered to work out their own tax position and drawdown within their current band, will do so. The smartest will be planning ahead according to needs – some putting money aside for extreme old age and long-term care and some drawing heavily in the early years on the assumption that later life opportunities to spend become more limited. Those who take occasional lump sums will be those with least need of their DC pension- typically those who have private wealth or decent alternative income sources (DB, buy-to-let etc) The liberators will usually have to pay a hefty tax bill to get their hands on their money so they will have to be pretty feckless or have a lot of conviction in their investment strategy to use this option.
So how does this touch payroll?
With a massive switch between the 500,000 retiring each year (not to mention the pent up demand of those who’ve been putting things off), someone is going to have to administer all this work. The most obvious candidates are the exiting pension providers, the insurers and the new mastertrusts. Expect many people to bring together (aggregate) their savings into one pot and drawdown from that. The very big companies will do what they have always do, run pensioner payrolls of their own- these may well become aggregators in their own right. But also expect many new operations to spring up, there will be a frantic battle over the next ten years for people’s retirement savings with wealth-managing IFAs, asset managers and insurers all competing for the job. The one thing they have in common- they aren’t much good at payroll! Which is why I see those who know about how to run payrolls, whether they are payroll software companies, payroll managers or provide outsourced services. This is an opportunity for payroll people to take a front seat. Payroll may not drive the bus but payroll people can do the navigation. Payroll people were back-seat drivers in the auto-enrolment consultation, They should make sure this doesn’t happen again.