AUTOMATIC ENROLMENT – THE END OF THE BEGINNING
Alex McCallum, Workplace Pensions Specialist
April 2019 heralded a major milestone for the Automatic Enrolment (AE) journey. The final phasing of contributions was implemented for workplace schemes and we reached what is known as ‘steady state’ with a combined contribution rate of a minimum of 8% being invested for scheme members.
However, this isn’t the end of the journey; in many ways it is just the end of the beginning. AE is here to stay and there are many areas that require focus and development as we move forward.
Let’s hear it for the employers
Over 1.5 million employers have declared compliance with the AE regulations since 2012 which is the key to the policy’s overall success. We hear a lot of trumpeting about the fact that over 10 million workers have been enrolled, and that is a fantastic statistic, but it is those employers who have adapted to the changes to Workplace Pensions that has been the driving force behind this.
Many employers have incurred additional costs associated with increasing contributions and/or altering their HR and Payroll administration processes and it is this investment and will to make AE work that has been so pivotal to its success.
Keep on en(rolling) on
Staging for AE was only the first step in the process for the UK’s employers. This is an on-going and continuous process that requires focus and attention to ensure compliance each and every time payroll is run within a business. Up until March 2019 the Pensions Regulator had used its powers of notification and enforcement on 283,730i times in order to ensure that employers met their obligations. This statistic clearly displays that the legislation has teeth and there have been several case studies released naming and shaming employers who have continuously flouted the legislation.
These powers extend to the monitoring of the on-going duties that employers are required to fulfil.
Three year re-enrolment (or cyclical enrolment to give it its Sunday name) is a key recurring process that employers must comply with. So far, 203,469 employers have been through the process of re-enrolment which has seen an additional 656,000ii workers being enrolled back in to the scheme.
This is proving a successful way of sweeping up employees who have opted out of the initial enrolment and prompting them to reconsider this decision. In many ways the process for re-enrolment is exactly the same as the initial staging process with a few differences. There are over 1 million employers who have staged who have not had to re-enrol yet so it is important to be aware of what is required to ensure you remain compliant with the rules.
2 steps forward
When AE started rolling out in October 2012 employers were given the option of phasing contributions starting at a minimum of 2% (1% from the Employer and 1% from the Employee). This was to minimise the immediate costs on businesses and also to mitigate potential opt outs from schemes if enrolment had started immediately at 8%.
April 2018 and 2019 saw the 2 contribution step ups processed to the following levels:
This was an important milestone for the AE journey as contribution levels reached a more meaningful level for all savers which will have a positive impact on retirement outcomes.
However, it is accepted widely that 8% of earnings (or a band of earnings) will not be a sufficient contribution rate for many people to achieve a replacement income in retirement that they need or hope for.
Reviewing the situation
In December 2017 the Department for Work and Pensions published their AE review with the sub heading ‘Maintaining the Momentum’.
This was an acknowledgement of the early successes of the policy but a clear statement that there is much more to do.
9.4 million workersiii were not automatically enrolled during the staging process as they do not meet the eligibility criteria i.e. they are under 22 or over state pension age and/or earn below £10,000 per annum.
Addressing this large gap in AE participation is one of the strategic problems that DWP has identified and they have made recommendations to partly address this by, for example, reducing the enrolment age to 18 years oldiv. This single change would bring in another estimated 900,000 new savers into pension schemes.
The other key recommendations from this review are as follows (there is no fixed timescale for implementing them just a target of ‘mid 2020s’):
- Remove the Lower Earnings Limit – this would make the first pound pensionable for all savers. Currently if an employer uses the ‘Qualifying Earnings’ definition of pay then the first £6,136 (2019/20 tax year) is not included on contribution calculations. This would improve savings levels for millions of workers.
- Annually review the £10,000 earnings trigger for eligibility - This would have significant impact on the coverage of the AE and would positively affect females and those in multiple jobs. We would like to see this earnings trigger removed to make saving for retirement more inclusive.
- Monitor and evaluate the impact of increasing contributions beyond 8% - the review acknowledges that the steady state of a minimum of 8% will not be enough for many people to achieve the retirement outcomes they desire. However, there is a reluctance to do too much too soon and potentially impact the encouraging opt out rates we have seen since 2012 (circa 9% of workers have opted out of AE). Therefore, DWP have committed to review this once the impact of increasing contributions to 8% has been understood. If people stay in schemes at 8% then it may encourage DWP to look at future trajectory for contribution levels.
At Scottish Widows we have, for many years as part of our Retirement Report, referred to 12% as a minimum benchmark to achieve an adequate outcome but for many savers they will need to be more and we feel that a lifelong savings rate of at least 15% is a sensible goal.v
Now you're in, are you engaged?
Another strategic problem that DWP is keen to address is the challenge people have in engaging with retirement and their future self.
We have 10 million workers auto enrolled many of whom may be saving in to a pension for the first time. It is fair to conclude that inertia has played a major part in reaching this fantastic milestone. People have automatically landed in a scheme without making a decision and potentially haven’t engaged since that happened. As these 10 million people are now saving at least 8% it is important to help them understand what this means for their future.
In the AE review DWP challenge pension providers to get to know their customers better, to use technology to create innovate solutions to tackle this age old problem of disinterest, and to help improve the visibility of pensions to customers so that it doesn’t feel like a distant thing that doesn’t need any consideration until later in life.
Digitisation of the pensions industry is now really moving at pace and more and more propositions are being created to help engage and educate customers and this can only be a good thing for those who have been Automatically Enrolled with little or no understanding of pensions.
At Scottish Widows we have developed a unique service to around 1 million customers who also have a Lloyds Banking Group internet banking account. As part of Lloyds Banking Group it has allowed us to present the Workplace Pension valuation next to day to day banking products and instantly increasing the visibility of the pension plan being offered by their employer. The average Lloyds banking customer visits internet banking around 22 times per month whereas still only a minority of people access their pension online on a regular basis. So by putting the pension value where people already visit it immediately increases access and visibility and moves us towards the normalisation of pensions as key part of someone’s overall financial view and wellbeing.
This is a great example of how technology and innovation can help accessibility and allow people to get to grips with the basics around their pension.
With the onset of Open Banking and the planned launch of the Pensions Dashboard the ability to see everything in one place is going to become the norm. We are delighted to be leading the way for our customers who also bank with the group.
Is visibility enough?
It would be natural to ask, after seeing your value: ‘is it enough?’ or ‘what does it actually mean for me?’
So it is important to offer customers easy access to modelling tools and educational material to help fill in the knowledge gaps that may exist around the pension basics.
For several years now we have offered short videos to help answer the most basic questions that people have about pensions. This is a great way to breakdown a large complex topic into small, bite sized messages. It helps to demystify the world of pensions which many people feel is too difficult to navigate around. You can find a selection of these videos on our Employer Hub which may help you manage some frequently asked questions that your employees have.
My experience whilst supporting employers and their employees over many years on the topic of retirement saving is that if you get the tone right and understand the key concerns or areas of interest of the individuals then they will engage on this topic. It is easy to say that no-one is interested in pensions and make that an excuse. What I have witnessed is that once you help people get to grips with the basics, fill in their knowledge gaps and promote the benefits of saving for the future then most people switch on to it and start to value it.
Engagement on retirement feels like something we should all be compelled to try our best to conquer especially with the growing number of people saving into Workplace Pensions as a result of AE and the desire we have to help people get the retirement they deserve.
The end of the beginning
Seven years into the AE journey there are many successes to celebrate: the fantastic effort of the UK’s employers in complying with the legislation and the phenomenal amount of workers who have been enrolled coupled with a lower than expected opt out rate. But this is only the end of the beginning. As we move forward we need to address the 9.4 million who have been missed out so far and extend the coverage of AE. We need to closely monitor contribution levels and have an on-going discussion about what an adequate savings level is and we need to drive forward with innovative and modern ways of engaging with this new population of savers to ensure they understand what they have got and whether or not it is going to be enough.