Jury still out on 2012 pension reforms
As the deadline for the commencement of the previous Government's much-vaunted pension reforms fast approaches, a number of survey reports have been published indicating that employers are still ambivalent about the changes. We highlight the results of two of the most recent surveys, together with research examining individuals' attitudes towards the reforms.
On this page:
Employers lack awareness
Chart 1: Awareness of workplace pension reforms
New employees treated differently
Expected impact of auto-enrolment
Association of Consulting Actuaries targets larger employers
Mixed views on auto-enrolment
Mixed attitudes towards Nest
Chart 2: Organisations responses to auto-enrolment and Nest
Individuals supportive of change.
Key points
|
In 2012, the pension reforms introduced by the previous Government in its Pensions Act 2008 start to take effect. The main changes include: the introduction of an employer's duty to automatically enrol "jobholders" who satisfy certain conditions in respect of age and pay into a qualifying workplace pension; a compulsory employer contribution of 3% of earnings in respect of employees who do not opt out of the pension arrangements; a duty on employers to re-enrol individuals who opt out every three years; and the introduction of the National Employment Savings Trust (Nest) scheme, which will offer an alternative pension arrangement for those employers who do not wish to auto-enrol their employees into a workplace pension plan.
In early 2010, the then Government passed the necessary legislation to enable Nest to commence operations. At present, Nest is intending to start on a limited basis in 2011. However, in its first Budget the present Government introduced an element of uncertainty into the matter by announcing a review of both the auto-enrolment provisions and whether Nest "remains the right solution" for encouraging increased pension saving.
In the meantime, two separate surveys have been published examining employers' attitudes towards the pension reforms, especially auto-enrolment and Nest. The first (PDF format, 3.23MB) (on the DWP website), which is very detailed, has been issued as part of the Department for Work and Pensions' (DWP's) research report series. The second survey (PDF format, 783K) (external website) was undertaken by the Association of Consulting Actuaries (ACA) and covers similar ground to the DWP's research report but in much less detail.
Employers lack awareness
The DWP's research into employer attitudes towards the pension reforms is based on a 2009 telephone survey of 2,550 private sector employers in the UK. The sample was weighted to reflect the size and industrial structure of UK employers, in particular the fact that while the majority of individuals are in employment with large employers, the majority of employers have fewer than 20 workers. Only 38% of the DWP's sample currently make some kind of provision for employees but 68% of employees work for organisations in this group.
The purpose of the survey was to assess the extent of awareness of the 2012 pension reforms among employers and to examine their likely responses. It follows on from a similar survey undertaken in 2007 and, where possible, tracks changes in employer attitudes since that date. About two-fifths (44%) of the employers had some awareness of the changes, more or less the same percentage as in 2007. The report comments that the research was undertaken before any communication campaigns to raise awareness, but the low level of familiarity suggests that the DWP has a long, hard task ahead of it. However, because employment is skewed towards larger employers, three-quarters of employees work for an organisation that has heard of the changes. Chart 1 illustrates the correlation between employer size and awareness of the changes.
Once the respondents had the changes explained to them, 56% thought they were a good idea, but this represents a fall of eight percentage points from the proportions giving a positive response in 2007. More than one-third (37%) thought that the reforms were a bad idea, a sizeable increase from the 26% who were against the reforms in 2007.
New employees treated differently
Although the pension reforms will commence to be phased in from October 2012, last year a high proportion of employers surveyed (61%) had not even thought about the reforms. Only 14% had started making preparations and, again, this was likely to be larger employers.
Nearly three-quarters of those employers who already have a workplace pension scheme intend to keep existing members in their largest scheme after the reforms are introduced. A further 10% expect to retain some members in their existing scheme and enrol the remainder into Nest (although the criteria for choosing which members stay are not examined). A small percentage (9%) of respondents say that they are going to move all existing members into a new scheme or enrol them in Nest.
Only 36% of employers expect to enrol new employees or non-members into their current scheme. Nearly 20% state their intention of establishing a new qualifying scheme for this group of people and 15% intend enrolling them into Nest. About one in five did not know or would not say what their intentions were.
The majority (60%) of employers report that they will make only the minimum contribution of 3% in respect of non-members and new employees. The authors comment that these employers are more likely to pay lower contributions in respect of this group than they are to decrease their contribution rate for existing members.
More than one-third of employers without any pension provision intend to enrol all employees into Nest. Only one in eight said they would enrol some people into Nest and the rest into a new qualifying scheme (again the criteria for choosing who goes into which scheme are not described). However, more than a quarter have no idea how they are going to meet the employer's duty to enrol employees into a pension arrangement. Those in this group are certain that they will only do what is necessary to comply with the legislation, with three-quarters stating that they will not pay more than the minimum 3% contribution.
Expected impact of auto-enrolment
On a back-of-an-envelope basis, employers thought that just over one-third of employees would opt out of pension provision. In spite of not really being sure of numbers, the majority of employers (84%) expect that the requirement to contribute at least 3% towards pension provision for employees who choose not to opt out would result in an increase to their total pension contributions.
Participants were asked how they would respond to any increase in costs. Perhaps reflecting the changed economic circumstances since 2007, employers say that they will be less likely to increase prices to meet increased pension costs and more likely to absorb the extra cost either in profits or overheads, or by making lower wage increases. The report notes that only 2% of employers have developed a plan to comply with the reforms. Its authors comment that the general lack of thought given to the possible impact of the reforms and their response to them, particularly by smaller employers and those with no existing pension provision, suggests that these two groups should be the target of awareness-raising campaigns.
Association of Consulting Actuaries targets larger employers
Although the DWP's research report is extremely detailed, surprisingly it does not examine attitudes towards specific reforms such as auto-enrolment or the introduction of Nest. However, this gap has been filled by the ACA, which, as part of its input to the Government's review of auto-enrolment, has published the findings of a survey it undertook to investigate employers' views on more detailed aspects of the reforms. The ACA has made a number of proposals to the Government's review based on the answers to some rather leading questions it asked of survey participants. It is not clear if the questions were asked to support the proposals or whether the proposals arose out of the responses to the questions.
Unlike the DWP, the ACA included public sector schemes in its survey. Its survey also focuses on larger employers. The ACA is intending to publish a report examining the attitudes towards the reforms of employers with 250 or fewer employees shortly. Its research was also undertaken more recently than the DWP's, being based on responses obtained in July and August 2010. To a certain extent the responses to the ACA survey will therefore reflect the economic situation in 2010 rather than in 2009. In addition, the Government had announced its review of the reforms by the time of the ACA survey, again possibly influencing responses.
Mixed views on auto-enrolment
The ACA asked questions on detailed aspects of the auto-enrolment regime. Hence, while 75% of employers support the principle of auto-enrolment, 70% perceive the regulatory regime surrounding it to be complex. In contrast to the findings of the DWP survey, 85% of organisations say that they are aware of the date between October 2012 and September 2016 when they must auto-enrol eligible jobholders into a qualifying arrangement. However, this probably reflects, first, the difference in the size of the schemes covered by the surveys and, second, the passage of time. In spite of this, only 43% of organisations have currently budgeted for what the ACA states are the "likely increases in costs arising from auto-enrolment".
Asked about attitudes towards specific aspects of the auto-enrolment regime, the employers surveyed indicated clear majorities in favour of the following changes to the proposed regime:
- 75% say individuals with less than three months' service should not be auto-enrolled;
- 66% agree that firms with one employee should be exempt from the requirements, and 61% say that firms with fewer than five employees should be exempt; and
- 64% believe the requirement to auto-enrol every three years should be removed.
These proposals form part of the ACA's recommendations to the Government's review of the reforms. In addition, more than half of respondents (52%) believe that the introduction of auto-enrolment should be delayed so that the complexities can be ironed out.
Mixed attitudes towards Nest
The ACA survey finds mixed attitudes towards Nest. Just less than one-half of respondents (49%) agree with its establishment; 22% oppose it on the grounds that existing commercial providers should be able to meet the market's needs (although the ACA comments that commercial providers have shown little enthusiasm so far for such an approach); and 29% disagree with the concept in principle.
Chart 2 illustrates how organisations say they will respond to auto-enrolment and Nest. Because the ACA obtained the information on the basis of scheme type, it cannot be compared directly with the DWP's results. The high proportion expecting to use existing defined-contribution schemes for new employees probably reflects the size of the employers concerned.
More than 40% of employers believe that the reforms will add to their costs. Unlike the DWP, the ACA did not ask how employers intend to absorb the extra costs. The opt-out rate assumed by the respondents to this survey is only 15%, considerably lower than that recorded in the DWP's survey. Again this probably reflects the profile of the two different groups of employers surveyed. One particularly unpopular aspect of the requirements is that minimum contributions are based on full earnings. Nearly three-quarters of respondents would rather they were based on basic pay.
The ACA also asked participants how auto-enrolment would impact on their organisation. In addition to expecting increased costs, 17% responded that it will lead to a levelling-down of existing provision, while only 6% thought it would leave to a levelling-up of benefits. More than one-third (35%) of respondents to this question say that auto-enrolment will lead to a review of existing pensions.
Somewhat confusingly, in response to the question "will you review existing scheme(s) benefits to mitigate the cost of higher scheme membership?" in a different section of the survey, 41% of organisations state that they are highly likely or likely to do so. For some reason, in the press release announcing the publication of the survey, the ACA has interpreted this result as meaning that 41% of employers will level down benefits even though this is not what the question asks and is a much higher percentage than the 17% figure mentioned above.
Individuals supportive of change
Neither of the employer surveys asked participants whether or not they thought their employees supported the changes. However, the DWP commissioned extensive research on the attitude of individuals towards the 2012 pension reforms. The resulting survey report (PDF format, 2.48MB) (external website) shows that people are not very aware of the changes, but, once the new reforms were explained to them, found them appealing.
The survey is based on responses from more than 1,000 respondents to face-to-face interviews, which, like the DWP's employer interviews, took place in 2009. Two-thirds of people had not heard of the workplace pension reforms and the majority of those who were aware of them knew little or nothing of what they may entail.
Following an explanation of the key features of the reforms, the majority of respondents expressed support for them. Nine in 10 found the idea of a compulsory employer contribution appealing; 83% were attracted by the opportunity to opt out of the scheme; and 68% treated the method of deducting contributions from salary as a positive feature. Nearly two-thirds (64%) viewed automatic enrolment as a positive aspect of the changes.
Around two-thirds of respondents said that they would stay in the scheme if automatically enrolled. The factors that increased the likelihood of individuals not opting out included: being under 30; earning less than £25,000 a year; and having modest savings. The majority of these individuals (70%) asserted that they would make the same decision if their employer enrolled them into Nest.
