He’s still at it – that Workie!

How prepared are we for the first big hike in auto-enrolment contributions in April 2018?

Should we be preparing our staff for a fall in take home pay?

What can we do to see pension saving as a positive?

Alright for some…

I spent most of yesterday thinking about these issues with people in payroll. Auto-enrolment is being taken very seriously by organisations like Sage. That’s because the hike in employee contributions from 1-3% and employer contributions from 1-2% in April is not just an operational but a business issue – impacting over a million small businesses up and down the land.

The nub of the problem is that those who typically take decisions on pensions , will not be impacted by this one; by which I mean those earning sufficient to absorb any increases from  their “net disposable income “.

Affluent  people  have advisers , have incomes to pay for them and are likely to be receiving an employer contribution well beyond the AE minima anyway.

The simple truth is that this in not an issue that most financial advisers are bothering about. This is an issue for business advisers and the software suppliers on whom they rely for mass-market solutiosn

Helping those just getting by

The people who will be impacted by the April hike are those just getting by, for whom an increase of £10pw in pension contributions will be £10 less a week on other things. There is currently no disposable income for  people at the bottom of the income ladder.

So I applaud people in payroll for thinking about these questions now, few people in my line of business see April 2018 as any kind of a milestone. Payroll software companies like Sage are our thought leaders.

Who are the stakeholders and what are their issues?

Communicating the forthcoming change is an interesting issue for providers. Turning the heat up risks alerting frogs that might hop out of the pan. Providers do not want to see 2018 as the year that the initial forecasts on opt-outs were fulfilled.

Don’t turn up the heat just yet!

But that’s what any early warning campaign risks doing. If providers are left with a lot of small pots and no likelihood they will ever be filled, the economics of auto-enrolment changes. Prices may not continue to fall and indeed they may eventually go up. However with a price cap in place, the scope to increase member charging is limited. Don’t look to pension providers for all the answers.

Ironically, employers, who also see their costs rising, may find the opt-out a convenient opportunity to sneak in a conditional pay-rise. The Pensions Regulator has no doubt considered this. It will be interesting how tPR approach the impending hike.

Employers who over-promote the financial damage of ongoing payments risk incurring the Regulator’s wrath for encouraging opt-outs, but under-promotion may leave employers looking negligent of their staff’s financial welfare.

While those schemes that are funded at 8% of the band (7% of total pay or 9% of basic income) will breeze through 2018 and 2019, large and wealthy employers have never had to consider auto-enrolment in terms of affordability, their problems have been with operability.

This is an issue for smaller employers and particularly for their business advisers, this is really about software solutions delivered to a mass market.

Have we any precedents?

To a large extent, the UK is in unchartered waters, the scope of our AE project has been quite inclusive (despite calls for AE to target self-employed and the gig economy). The employers staging today have little idea how a pension works and only the vaguest concept of what makes for an adequate income in retirement. With nearly 1m new employers in the saving system, it is anybody’s guess how April 2018 will go.

There are precedents for this;  experiences abroad, especially in New Zealand, suggests that the kind of hikes we’ll see in 2018 and again in 2019 when the bill increases again from 5 to 8%, could lead to a sharp spike in opt-outs. This is the  biggest worry for a Government banking on AE taking up the strain on the state of our growing older for longer.

Set against this negative precedent there is good news. When Marks & Spencer set the bar high when they auto-enrolled in 2012, opt-out rates remained at roughly the levels for staff with minimal contributions. To get the chunky contributions from M&S, staff had to contribute 5% of salary (gross) and most did, despite most of the new eligible  working on the tills and shelves. M&S argued then that people are a lot more robust when asked to save large amounts than might be expected.

I am confident that so long as the messaging on workplace pensions and on long-term saving remains positive, we will manage opt-outs as successfully in 2018 as we have since 2012.

The value of good communication

The statutory communications that employers were required to provide their staff when they enrolled paid dividends. People I speak to tell me that they felt that this was part of what they had to do and they felt awkward bucking the trend.

I hope that employers will continue to tell staff “how it is” and that the Pensions Regulator will give employers with no pension experience the templates to explain things sensibly.

The value of a good workplace pension

However there are things it will be harder to explain… these chiefly relate to where the money goes.

I worry that when employers are asked simple questions like –

“who is managing my money and why did you chose them?”

they will be stumped for an answer.

That’s why I’m developing http://www.pensionplaypen.com to deliver pension ratings for SMEs that show how one pension is performing against another. I’m a firm believer in benchmarking and if we need to provide value for money tables – we will.

People should be able to know where their money is going, what they are paying for its management and how they can take decisions on their money – if they want to.

But this service will only be available to those who are given access. I am dependent on the likes of Sage to deliver the key messages

And I know of very little else in the market that SMEs will be able to call on.

I don’t suppose that will last, organisations will come to fill the vacuum, but it worries me that there will be a lot more demand for employer led scheme governance than supply.

Why people will bother with their pension

We all know that contributing 5 or even 8% of band earnings will not be enough to give people a full replacement wage in retirement. But it’s a lot better than nothing and we’ve got to start taking up the investment value that workplace pensions can and are bringing to our savings.

It’s a truism that when someone’s pension pot is worth as much as their car, they start taking notice of it. We don’t want people driving around in old bangers and we don’t want pensions that are unreliable or bad value. We need people to feel confident they are in the right scheme and that their employers will keep it that way

People will also start bothering about their contributions. I see big problems ahead for net pay schemes collecting money from non-taxpayers.  Ros Altmann is right to be rattling her pearls about this. We cannot have  Government promising an incentive which does not turn up. With employee contributions increasing to 3 and then 5% , we need to sort net-pay incentives out asap.

Whether it’s because the pension is worth more than a car or because people are paying a multiple of the minima from 2018 and a multiple again in 2019, pensions matter.

Auto-Enrolment will – as Sage and others know very well – morph  from being a payroll to a pension issue. I suspect that payroll is rather better placed than many think – to manage this.