Director general, IoD
Head of industry development, corporate pensions, Scottish Widows
Chief executive, Ntegra
Managing director, Torquil Clark
Group chief executive, drp
Finance director, Adnams
Finance director, Baxter Freight
Senior adviser, financial services policy, IoD
Finance director, Waterstons
Simon Walker Welcome all of you and thank you very much for coming in. Auto-enrolment [AE] is probably the biggest reform in pension savings over the past few years. All employers, no matter how small, have to establish a pension scheme and enrol qualifying staff into it, making contributions alongside their employees, which our members say represents an onerous duty on them, with heavy penalties for non-compliance. Over the next three years, auto-enrolment will continue until even the smallest employers have complied. So it’s a good time for us to take the temperature of IoD members – how they’re approaching the exercise and what their experience is so far.
We’d like to understand more about how members have gone through the process, coped with those challenges and what sources of help, if any, they used. And we’d like to understand what the most difficult parts of the process are and what you think could be done to improve things, because that feeds into our policy work, which Malcolm Small directs in this area. This informs our discussions with ministers and officials – and we genuinely are listened to a lot.
We’d also like to know from you what you think the next move in pension saving for employees should be. We know from our research into members’ attitudes that most understand the social policy imperatives behind auto-enrolment – trying to get through to young people that they’re going to be in real trouble in old age unless they make some provision now.
But should we be pushing for compulsion, for higher contribution rates now that we’ve got through the starting gate on auto-enrolment? Where do we go from here? It’s a pleasure now to pass over to Peter [Glancy], who has worked with Scottish Widows for several decades, making him an invaluable contributor on a changing scene. Peter…
Peter Glancy Thank you. I think the big challenges for employers are twofold. One is, ‘as an employer, how do I approach auto-enrolment in terms of the operational and financial challenges that it presents? Most employers, we’ve found, have underestimated the lead time and complexity of preparing for auto-enrolment… and also, beyond the staging date, the ongoing eligibility assessments and contribution assessments. So it’s making sure that not only are you preparing to hit your staging date in time, but you have an infrastructure that’s really geared up to helping you run the thing on an ongoing basis in an effective manner.
The other side of it is the benefits for individual scheme members when they get to the time limits, and the quality of the pension scheme in terms of the government and the investment options available. The government has put some constraints on charges now, which I think protects people who are auto-enrolling from exploitation. But there are huge differences in terms of people’s outcomes at the time and depending on where they invest during the 30 or 40 years that they’ve been saving – and also in how engaged they’ve become in terms of saving the right amount and then planning their retirement journey in the right way.
Many business leaders, of course, will be in the pension scheme and have a strong interest in how that performs. And, of course, employees can only leave the workforce nowadays when they feel that they are financially able to retire, so I think that business leaders have an interest in making sure that their staff are well prepared and well supported when it comes to their retirement.
Walker Dale, you’re largely through the process – how have you found it?
Dale Parmenter There’s been a missed opportunity from the whole scheme. The idea behind it, all well intended, is to get young people into a pension scheme. But having the opt-out killed that overnight and what we’ve found – we’ve got 75 per cent of our people already in the company pension scheme we introduced five years ago – is that all of those people have opted out [of AE], including myself, because there was no point in being in. The other 25 per cent, by and large, were apprentices who weren’t eligible to join the scheme anyway. They either didn’t see the point – it’s years away, they want the beer money… So they opted out as well. We ended up with nobody in the scheme.
Walker That’s something of an indictment of the policy, isn’t it?
Parmenter It was a missed opportunity, because if you want young people to take this seriously then perhaps, if you weren’t in a scheme, then you weren’t allowed to opt out.
Steve Rafferty Part of the issue is that there are people who are uninterested for various reasons – largely young people who have other aspirations at that stage in their life, including student debt and getting on the housing ladder. And what I’ve found is it’s becoming increasingly difficult to justify to people. Part of that is a mixed message that the government and the pensions industry have given.
If you think of auto-enrolment, the purpose is to make the decision for people effectively, it’s to say ‘it’s in your interests to save for your retirement, and if you’re not going to do that yourself we’re going to impose that upon you – subject to an opt-out.’ Then, on the contrary, we have had the proposal allowing people to withdraw the whole amount when they’re 55 and blow it if they wish. It doesn’t make sense to tell someone at 54 ‘we think you should save’, only to allow them to spend it all at 55.
Nigel Murdock There does need to be more education about it, because pensions clearly have tax breaks, so are attractive. Save £100 into a pension compared to £100 elsewhere, and that £100 in the pension will accumulate to a much bigger sum, comparing the same investments. My view would be – and I know that there are costs here – if an employer is being forced to contribute to a pension scheme, they should use that to their advantage and engage with their workforce more with regard to the communications side.
Rafferty I agree with that [but] one of the interesting things from the opening remarks was ‘what’s going to happen?’ The problem with the pension is we don’t know. I don’t think many people would have predicted a year ago that we would have this freeing up of your [pension] pot at 55… [So] yes, you’re currently getting tax relief, might that change? We don’t know.
Parmenter Is there a thought of linking the pensions with the housing ladder? Most of the people say to me, ‘Look, I’ve got a mortgage, or I’ve got to find a deposit, it’s an expensive time.’
Malcolm Small I’ve been involved in discussions on that. It’s technically possible – you can do it in the States. The problem has been that quite often people wound up with a pretty poor pension outcome because they’ve actually raided the fund quite a lot. And when we do our research, 50 per cent of people say, ‘Well, I’d save in a pension if I could get at the funds for things like a house purchase.’ The other 50 per cent say, ‘I like not being able to touch the thing until 55, because otherwise I’d be tempted to put my hands on it.’
Walker Has anyone had success in enthusing younger people?
Andy Davies Yes, I think we’ve been reasonably successful, but if you look at the type of people we employ they tend to be mostly graduates – they’re quite analytical and before they take any decisions there’s a spreadsheet involved. I think they’ve all looked at this and thought, ‘yes, this is a good thing, I do need to make a contribution…’ [But] another thing is the burden of administration. We changed our pensions scheme so it was more in line to make it easier for us to operate once we had to be enrolled. The time it’s taken to get us to that place by our HR team is quite considerable. We’ve held a number of meetings, and that’s taken a lot of time.
Glancy It comes back to balancing the short term with the long term. Yes, there’s a short-term challenge for employers to comply with their new employer duties under the law but setting the scheme up in the right way, so that the employees get good outcomes at retirement, is critical for the business in the long term.
Walker What about the economic climate and issues such as inflation, the annuity on rates and the complete uncertainty?
Glancy That’s right. What’s happened is that if we move away from final-salary pensions to the money purchase pension schemes – which most people use for auto-enrolment – the employer has passed the funding risk, the longevity risk, the inflation risk and the investment risk from the employer over to the employees. The employers used to pay very professional people to give them great quality advice in all of these matters, but now the employees are sitting there in these pension schemes and having to take all of these risks. So they don’t know how much their pension pot is going to be at retirement, and even when they get to retirement with a pension pot of a certain size, they don’t know what income that’s going to purchase them until they get there because of annuity rates etc. So it’s a very uncertain challenge for employees and we need to give people much more help, education, guidance and support.
Michael Stirrup I think that risk, in a perverse way – being passed to the employees – kind of enthuses some of our younger employees to get involved in investing in pensions. So we’ve educated them… that actually they can move their funds around, choose their funds, do a bit of research. And I think that education and pointing them in the right direction, getting that interest raised, is a key thing, particularly for young people.
Walker Can I ask those of you who’ve implemented auto-enrolment, who helped you? Who did you turn to for advice and support?
Parmenter We used a company to help but found it very slow to get information. From a comms point of view, we found the information we could pass on to employees not great. It needed to be much more targeted, so we’re trying to re–communicate it. We have regular team meetings, the whole team together every month, and did a whole session on it and then we offered them all one-to-ones. That’s ok, but we could have done with a bit more support in terms of what’s out there to help us communicate the benefits.
Stirrup The financial advisers that we were ?using set up our group personal pension scheme in the first place – they didn’t really know too much. They weren’t particularly well prepared. So we were asking them questions, they were going off to ask the pension provider and it was a little bit like Chinese whispers really – they were taking quite a long time. In the end we went straight to the pension provider, got a really good contact there, a day-to-day contact, and managed it that way. We cut out half the process, which made things a lot easier.
Murdock I think if you are going through the process, it’s important to talk to people who’ve already done it. If you’re going to speak to somebody, make sure it’s somebody who’s gone through the process already. Your normal IFA won’t necessarily be expert in this area and it is a very specialist area, very complicated.
Stirrup You don’t realise until the end how much paperwork and stuff like that is involved. We purchased an off-the-shelf system to help us with auto-enrolment, which was really good and helped manage that administration process.
Small Where did you get the system from?
Stirrup From Sage. It was a bolt-on module to Sage Payroll.
Davies We used an adviser. There was definitely a lag between them having to go away to talk, because they were looking at the market for us, but we had a good provider. It took quite a lot of time to get the right information and get employees’ questions sorted properly and in the right manner. We then had some direct presentations from the provider as well to address that. But it is a bit of a problem because it’s not completely static is it? There have been changes in legislation, so the advisers need to keep themselves up [to speed] in the market… the message is about being well prepared before it kind of lands on your lap.
Walker Peter, aren’t there an awful lot of layers between the provider and the recipient, and couldn’t some of those be eliminated?
Glancy I think the answer is probably yes, but it takes time. Traditionally, the big product providers, brands that we’d recognise, have done most of their business through financial advisers who have offices up and down the country and relationships with the businesses – we’d expected financial advisers to be providing a lot of guidance and support to their client, and many of them haven’t.
And that’s meant that the product providers have had to try and reach out to help clients and they don’t have the geographic coverage, so they’ve been rapidly trying to gear up and put boots on the ground up and down the country to try and step into that gap. But it takes time to grow pensions experts and help thousands of customers with advice. We’re essentially product manufacturers but we’re stepping into that space. The other side of it is payroll. Auto-enrolment is essentially an exercise in data management in terms of collecting premiums, reconciling the payslips, handling the taxation aspect and squaring it all off. Ideally, auto-enrolment would have been done in payroll, but the payroll industry, at the time, was tied up with real-time reporting for HMRC and they couldn’t look at auto-enrolment – they’re starting to look at that now.
If you haven’t done auto-enrolment yet, you probably should be looking at your payroll provider as your starting point for a technology solution – because it’s integrated and a lot of the payroll providers are starting to speak directly to the product providers, so that’s taking out a lot of these layers of middleware and software. But an ideal solution for me would be a payroll system with integrated auto-enrolment that has an electronic linkage to your pension scheme and that will make it simpler for future stagers.
Stephen Pugh We had bad experiences with both the payroll provider and the pension provider in terms of them not doing what they said they were going to do. We use a very large external payroll provider – they wiped our data out twice.
We also had issues with the pension providers, who don’t have consistent processes. We did most of the work ourselves. We did have an IFA working alongside us but, because we were at the top end of his client base, he didn’t really have any knowledge of the process. There are 580 pages of advice on the pensions regulator’s site, so anyone who’s got a casual afternoon can obviously research it for themselves!
Walker That must be a huge problem. When I get pension documentation, I’m reasonably financially literate but I find them: A, quite difficult to understand; but B, the sheer volume means you can’t get through it.
Parmenter I think plain English would have been a lot simpler, and something really pulling more at the emotional side, rather than the technical side. We also ran workshops, so we’d have smaller groups like this that people could chat with advisers in – but it was all nuts and bolts. It wasn’t about what will happen in 40 years’ time and why we need to do it. So, even if it had been a video or a set of PowerPoint slides that were a little bit more targeted to the audience, rather than lots of technical pages and 500 pages of advice, which you’re just not going to read.
Walker What would you do differently if you were starting from scratch now? What’s your advice to other IoD members who are going to be doing this for the first time?
Pugh We had a slight setback when one of our non-execs decided ‘well, I don’t think the scheme design is right’, and we had to square it up… There are a lot of pieces to the jigsaw, so start early – involve as many as you can, do as much work as you can upfront. But I realise, for very small businesses, that’s quite a big ask.
Davies Make sure that you select a really good adviser who knows the market well… But then it asks the question, doesn’t it: How do you select a good adviser? How do you know that they’re more interested in helping you than just thinking about what their sales opportunity might be?
Parmenter Looking back – and obviously there wasn’t the information at the time when we started out – I want to see case studies and perhaps talk to other members who’ve been through it, to say ‘what was your experience, what are the pitfalls?’
Small We know, from what our members are saying to us, that the first port of call for smaller employers will be their accountant, who normally does the payroll. I’m chairman of a company where we’ve got 70 employees but the accountant still does the payroll. And, you know, he’s effectively the FD and sits in on board meetings, but he’s an accountant with his own business. So these people are going to be the first port of call and many of them are unprepared for it.
Walker Let me broaden things and say, what would you like the pension system to look like?
Small I’m hearing from some parts of the research, ‘why don’t we just make this compulsory and then if I’m paying you £10 this week, £1 of that goes into the pension scheme, and that makes it so much easier.’
Rafferty That’s the elephant in the room, isn’t it? Because the logical conclusion to this is that it is too complicated for private individuals… In Scandinavia, for example, taxes are higher, yes, social security costs are higher, but there’s a very reasonable version of the old age pension for everybody at whatever age. And I think that’s the way it will go because it’s too difficult for employers, even if you get the mechanics right. This is a social issue, this is a government issue, not something that should be left to a private individual.
Pugh Auto-enrolment is two per cent at the moment. That’s ridiculous. That’s not going to pay for any sort of pension. Even in 2018, when it’ll be eight per cent, it’s not going to pay for much of a pension. It’s probably only a third of what a public sector pension would be.
Glancy The interesting question is the role of the employer in all of this because it’s the balance between the individual and the state. I think there was an initial ambition to see if employers would take back some of that risk and some of those costs that have moved from employers to employees over the last couple of decades and that’s not going to happen in my view. In a global economy, employers can’t afford to take back those costs and those risks.
But [the government has] set up an infrastructure for auto-enrolment that places employers squarely in the middle of all this – with no real need. What we probably want to try to achieve in the short term is remove as many decisions from the process as possible. Remove all of the decisions from the employer, remove all of the decisions from the employees and just make that a mechanical exercise – that would really simplify things.
Walker Thank you all for a thought-provoking discussion.