Anyone who manages payroll, whether in-house or as an outsourcer, will by now have discovered the perils of auto-enrolment. This article will not rehearse the process issues (you’ll be relieved to know).
But with auto-enrolment come workplace pensions. Currently the majority of workplace pensions “don’t matter”, so long as contribution rates are set at current levels , their impact feels like an adjustment to NI and neither corporate or private cash flows are in peril. This changes as the phasing of contributions unwinds in 2018 and 2019.
Experts have cogitated on what the increase in minimum employee contributions (from 1 to 4% of the band) will mean in terms of opt-outs. But payroll should be braced for a different challenge. The question that many staff will be asking is just where all this money is going and how did someone decide on the workplace pension in the first place.
I ran a very interesting series of training sessions on this question in December. One of the objectives was to flush out how payroll people and accountants explain the pension decision to their clients.
Listed below are the top ten messages fed back to us.
- We just use NEST
- We know and use an IFA
- Our clients are too small to thing about this.
- We don’t want to be involved in giving advice.
- Pension Advice is too expensive
- I don’t have anyone to help on this
- We can’t afford to use third parties .
- All pensions are the same.
- How can anyone predict what is best in the future?
- All my client wants to know is how much AE will cost
I am sure that a lot of these statements will resonate with you! But do you – in your heart of hearts, feel comfortable about pensions – even if you “own” some of these statements?
The Pensions Regulator states that “employers must choose their workplace pension”. The dictionary definition of choice is “an act of choosing between two or more possibilities”. It is actually quite hard to find a word for the opposite of “choice”. We are used to the phrase “you have no choice”, it is one that the Pensions Regulator uses a lot – “you have no choice, it is the law”.
If we had no choice, there would be no peril in pensions. The original conception for the earnings related top-up pension , involved “no choice”. Typically, when choice is granted, peril follows, anyone familiar with contracting-out decisions and the complexity of guaranteed minimum pensions will understand where I am coming from!
Back in the day when the “go/no go” decision was being taken on auto-enrolment (2010), I sat in a room where the then pensions minister (Steve Webb) asked a group of pension providers who expected to be offering workplace pensions in 2017. Only NEST put its hand up! The Government may have considered that the peril of genuine choice – would have become the rather easier decision we know as “Hobson’s choice”, a choice of one.
But this has not turned out to be the case. There are a number of good pensions that rival NEST and when the Government ask employers to choose, they need to think not just of NEST but of other options. A colleague of mine put it well in the session (he used to be a teacher).
“When you do your maths exam, you’ll get a mark for being right but two marks for showing your working”
The peril of pensions is not in the answer. It is unlikely that (post the Pension Schemes Act) we will see a workplace pension fail. The peril is in not being able to show the working.
We know exactly what happens when an intangible product is sold without a proper recorded explanation (an audit trail). There may have been proper sales of PPI but the Banks had no way to prove that the customer understood what they were buying and the risks of purchase.
The same story is familiar to old pension lags like me. When I sold my business in 1992 it’s value was impaired by 50% – not because I had given bad advice, but because I had no documentation to show that the advice was good.
Your clients may not know about pensions and many of them do not care to know. As accountants and payroll people, you may not know (or want to know) about pensions. You need – urgently – to “know a man who does”.
When I wrote the STEPS (Second-Tier Employee Pension Scheme) booklet for the Federation of Small Business in 1998-9, I had a vision of an auto enrolment scheme; but not quite as it has been ‘rolled out’ by Stephen Webb and successive government ministers.
STEPS was designed to replace SERPS and use the 5.8% of salary NI contribution in the SERPS formula as the basis for a new or revised invested mechanism for providing a top up state pension.
The funds generated by STEPS would be invested on a ‘with profits’ basis. In fact the proposal was to use existing with profit funds (many existed within mutual offices / industrial branch insurers and Ordinary Branch life assurance companies) and a combination of all of them. Spreading the risk over diverse long term funds would have been so easy to monitor with salaried staff at the core and little or no short term speculation.
What has transpired is a typical government response whereby SERPS contributions of been absorbed to provide a basic pension and Auto Enrolment patched on to take even more money out of employers’ resources and of course the pockets of their employees in the name of ‘income freedom’ when they reach retirement age, whenever Government decide that might be.
The fact of the matter is that from 2018/19 something around 31% of an individual’s income above the lower earnings level will be devoted to providing their state pension ( this element absorbing approximately three quarters of the combined NI /AE contribution and the balance paying for State ‘social’ benefits) .
The state pension is an entitlement, not a benefit, and is paid for in full during a person’s lifetime albeit a pay-as-you-go system therefore there should be some mechanism by which any government is accountable. Those mechanisms were over-ridden in the late nineties and beyond with impunity and then Stephen Webb, whom you mention, entered the scene with his broad imagination but with little fact or experience to substantiate his Auto Enrolment theories. AE simply will not work within the current investment strategy.
I worked on STEPS in the mid-1990s, together with my associate in the project Nick Taylor, an actuary with broad long term experience of insured funds. We put together a mechanism that would combine a pay-as-you-go system coupled with a mechanism that had been proven to work over a 200 year period, With Profits funds.
Unitisation and speculation have won the day. Guarantees have been ignored. Fixed interest, it seems, will be the core of what will merely be feeding yet more money into government coffers for them to speculate with, as opposed to the long term investment in both government and industry which is the hallmark of ‘with profits’ fund long term strategy.
Perhaps, for once, we should turn the clock back.
STEPS, in its completeness, was given to the government actuary free of charge by the Federation of Small Business to evaluate and implement in a far different way then has now been achieved, and at a lower cost to UK citizens. I would like nothing better than to sit with Nick Taylor and review the current situation with you Henry or anyone else who, like Dickens in that quote from Tim that appears in later blog, might broaden the span of good without taking more out of peoples’ pockets and leaving them at the workhouse door.