The legislation that effected auto-enrolment has created the widest ranging change in pensions for a generation or two. It will have massive implications for the future pension income for many in society, as well as employers throughout the land, warns LEBC's Divisional Director, Glynn Jones.
In my dealings with HR Managers, it would seem that much of the legwork to date has fallen into their laps to date, but that could all change soon. Typically, HR managers are employee-centric by nature and always looking at ways of improving the “offering” from the employer. Over the years, many employers have differentiated themselves by installing a pension scheme as they look to compete for the best employees and retain their best staff. But auto enrolment now throws another challenge at employers; how to ensure their pension scheme retains its sheen when every employer has to have one. This will be particularly difficult as the demand on finding and installing a scheme, or reviewing an existing scheme is looking increasingly difficult.
There are currently around 200,000 group schemes in the UK and in 2014, 40,000 organisations will either have to set up a scheme or review their existing scheme to ensure that it can fulfill the requirements of auto enrolment. 40,000 new and reviewed schemes will push the pensions industry beyond existing limits as it is normal for a major pension provider to set up only 600 new schemes in a 12 month period, and there are fewer providers now. Over the past few weeks, due to a Government review of group schemes, it has become clear there is a likelihood that the Government will introduce three new rules around pensions that will lead to both higher costs to employers and greater demands over the two years.
The first, and most likely change is a ban on Active Member Discounts (AMDs), which have differential pricing for active and ceased scheme members. Up to 35,000 employers have schemes with AMDs because they can see the benefit of a competitive annual charge while members are employed by them and then ex-employees can transfer away upon leaving without penalty, if appropriate. The second likely change will be an introduction of a charge cap on all schemes used for auto enrolment. This might be good news for many employees and anything which improves the potential for better outcomes for members must be welcomed, mustn’t it? Well yes, in normal times. But if this change is enacted, we can see at least two possibly significant downsides. Firstly, these schemes would need to be reviewed at the same time as the pensions industry is stretched as previously outlined. Secondly, there are many schemes with facilities beyond what the cap might be, which significantly improve the potential for member outcomes, such as advice to employees, education and access to a much wider range of funds to suit bespoke needs.
This could affect up to 90,000 schemes and this review might have to be completed by April 2014. And at a time when there is no capacity in the pensions industry for advice, support or guidance. The third change, which seems less likely, is the removal of commission on schemes used for auto enrolment. Many services to employers, as well as employees, have been funded by commission over the years including the changes resulting from auto enrolment legislation. If commission is banned retrospectively, then employers will have to fund in full all advisory, governance and pension change services incurred to date as well as going forward. Clearly this would be difficult and a major burden for employers, as they have had to budget for the contributions. They would then be saddled with the additional full cost of implementation and ongoing governance.
At the end of an article, it is normal to offer guidance as to how best to proceed, but this is not easy in an environment changing with retrospective legislation. I would strongly suggest HR Managers become fully conversant with these issues and how they might affect their organisations, so they can be ready to make changes should legislation be passed. As auto enrolment becomes engrained, and all pensions look the same, then they should look at how to differentiate their employee benefits offering.
