Gauging the Success of Auto-Enrolment with My Pension Expert

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Auto-enrolment is now reality and the challenge of providing workplace pensions for all has now begun.

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According to data produced by the Pensions Regulation, by December 2013 there will be as many as 18 million auto-enrolled employees in the UK

On 1st October 2012, the largest employers in the UK began to auto-enrol qualifying staff into pension schemes. This is something that has taken several years to implement. However, while this may appear to conclude a project that has survived many difficult spells during its infancy, in reality things are only just beginning. According to data produced by the Pensions Regulation, by December 2013 there will be as many as 18 million auto-enrolled employees in the UK. Much work lies ahead.

A pension is something that employees will save into for the rest of their working lives. Nearing the point at which they are looking to retire, they will then buy an annuity, which will provide them with an income for the rest of their lives. Companies such as My Pension Expert help with comparing annuities to ensure the best annuity rates are found from the whole of the market.

How, then, do we gauge the success of a project with such a large timescale?

Andrew Tully, pensions technical director at MGM Advantage, suggests that there are several elements involved in the process. The Department of Work and Pensions, the corporation responsible for measuring the success of the auto-enrolment scheme, have so far been silent on their intentions.

So precisely what elements can be used to measure the success of auto-enrolment?

Given that the scheme is very much a work in progress, the preparedness of employers is a paramount factor. The problem, however, Carl Lamb of Almary Green explains, is that many employers are leaving their preparations until the last possible moment, particularly those who have staging dates over two years away. This makes it more likely that these staging dates will be missed.

As such, it will be difficult to gauge the compliance of employers. Is the Pensions Regulator able to locate those who don’t comply? They certain have the legal jurisdiction, but it would require huge amounts of administration.

Ian Price, head of pensions at St James’s Place, concurs that preparation are being left late by some employers. He believes, however, that larger employers can show the way by undergoing the autoenrolment process early and allowing smaller companies to understand the process.

Some industry commentators argue that the financial crisis means that preparation has to be put off by smaller employers for fear of the costs. Price likewise suggests that such employers require support throughout the auto-enrolment process, although no delay in rolling out the scheme has thus far been permitted.

Price argues that difficult financial times lead employers to reduce their pension funding, and that these companies must be guided to ensure they are not brought down by pensions.

So whilst the effect on employers is one important factor in the success of auto-enrolment, whatabout the employees?

The percentage of employees who remain in the pension will have a big impact on the success of the scheme, claims Darren Philp, NAPF’s direicter of policy.

Philp suggests that this is something that can only be gauged over a long period. While it would be a good return if two thirds of employees chose to stay in their pensions, this is something that needs to be tracked over the next 15 years as opposed to just the next couple.

The government, Almary Green’s Lamb points out, should have done more to ensure the number of employees taking up pensions is as large as possible.

Giving people the chance to opt out, Lamb says, was a mistake. Making the pension compulsory would be the most effective method.

If the number of those choosing to opt out remains relatively small, it is thought that the level of employee interest will steadily increase and ensure high levels of contributions as well as investment activity.

People must save more, says Tully, as they will get less from the state when retired. They must realise the importance of saving.

This is something that will not happen immediately. It took around two decades for engagement levels to really increase after auto-enrolment was introduced in Australia in the 1980s.

Hopefully schemes such as the NAPF’s Pension Quality Mark will be able to improve engagement numbers. Philp says the scheme was launched with a view to examining contribution levels and to acknowledge employers who offer high quality pension schemes to their workers. Phil believes that in order for engagement to increase, people need to be convinced that saving is a
necessary habit.

Evidently there are a number of factors to be considered in the assessment of the success of autoenrolment. While the engagement of employers is one key area, the next stage is employee engagement with respect to contribution levels as well as investment choice.

Phil notes that auto-enrolment is a one-time shot at reforming pensions in the UK. It’s a chance to rebuild trust in pensions and increase transparency. He hopes that people will come to value the importance of saving into their pension.

Again, however, Philp recognises that this won’t be done overnight.

So, what happens next?

Philp argues that longer term progress needs to be looked at in order for further improvement to be seen.

Getting people to save into the right kind of scheme is the next step, he claims. In terms of contribution and investment plan, the risk is all on the individual. This is very complex, so a high level of governance is needed.

Scheme members must be guided through important decisions. Trustee board may act on the member’s behalf. Having someone working with the individual’s best interests in mind and who can guide them on factors such as the investment plan is apposite for the membership.

My Pension Expert is a company of Independent Financial Advisors who specialise in the at retirement market.

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