Plans still hazy for pension auto-enrolment

Employees will start to be automatically enrolled into pension schemes in 12 months' time. A series of surveys has examined the preparedness of employers, the approach they are likely to take and the potential impact.

On this page:
Chart 1: Likelihood of employers mitigating cost of increased scheme membership by levelling down benefits
Awareness and preparedness
Basic knowledge among employees
Budgeting for the costs
Which scheme to use
Changing existing schemes
Impact on employers
Employees' likely response
Seven surveys on auto-enrolment examined.

Seven surveys published in recent months suggest that many employers are ill prepared for auto-enrolment, although most have it on their radar. Rather surprisingly, few believe it will increase costs significantly, although the surveys suggest that many costings have been made on the back of an envelope. It seems that the most popular option will be to auto-enrol staff not currently members into an existing scheme.

Below, we examine the main findings of the seven surveys, while their coverage and availability are set out in chart 1.

Awareness and preparedness

According to the survey conducted by the Association of Consulting Actuaries (ACA), two-thirds of employers currently offering no pension scheme say they are unlikely to auto-enrol employees. It concludes that this suggests that "many smaller employers have as yet not understood the new legal requirements". Yet the ACA survey also finds that 72% of employers say they are aware of the date when they must auto-enrol eligible jobholders into a scheme - a date that can be any time between 2012 and 2016.

The smaller Hymans Robertson survey closely replicates this finding. Of the HR and finance decision-makers responding, 97% knew about auto-enrolment, but only 76% knew when auto-enrolment would need to start at their company. Despite this, almost all were confident of meeting the deadline!

According to Hymans Robertson, most were also over-optimistic - in the consultancy's view - about how long it would take to prepare, especially as only 51% claim to have the infrastructure in place. Communicating with employees is seen as the single most important task to be completed, followed by the financial design of the scheme. Smaller numbers rate setting business objectives, assessing in-house and external supplier capabilities, getting payroll systems set up or testing processes as the top priority.

Basic knowledge among employees

Recent research by the Chartered Institute of Personnel & Development (CIPD) among more than 2,000 employees finds that 46% of those working in the private sector and 42% of those employed in the voluntary sector say that they are aware of the legislation requiring eligible jobholders to be auto-enrolled. Knowledge of auto-enrolment varies significantly by industry sector: 57% of those in the finance sector, 54% in construction and only 30% of those in the hotel and catering sector are aware of the impending requirement.

Unsurprisingly, the CIPD survey finds that younger people are less likely to be aware of the developments. It finds that 31% of those aged 18-24 not working in the public sector know of auto-enrolment, but this rises to 40% of those aged 25-34 and 45% of those aged 45-54; among those aged 55 and over, 57% are aware. In the public sector, the survey finds that awareness varies by seniority, with those in non-managerial roles being less likely to know about the requirement. It also finds that, in the non-private sector, men (54%) are more likely to know about auto-enrolment than women (38%).

Legal & General suggests that just 29% of employees (out of only 107 questioned) are aware of auto-enrolment. Few, even among those who have heard about the development, appreciate that auto-enrolment generally involves a member contribution.

Budgeting for the costs

Just over one-quarter of employees (26%) say they have budgeted for the costs of auto-enrolment, but this falls to only one in seven among employers with 49 or fewer employees, according to the ACA research. It finds that budgets are typically based on estimates of 25% of employees opting out of a workplace scheme having been auto-enrolled, but smaller employers are estimating higher opt-out rates of between 30% and 40% of employees who are automatically enrolled.

The survey conducted by the Pensions Management Institute (PMI) and JLT Employee Benefits finds an even lower proportion of schemes that have quantified the costs of auto-enrolment, with only 14% having done so for the direct and indirect costs and two-thirds having done neither. Aon Hewitt's survey has rather more upbeat findings, but still finds that one-third of schemes have yet to undertake any pension contribution-cost modelling.

Hymans Robertson's survey also paints a gloomy picture on budgeting. It finds that 70% do not know how much auto-enrolment will cost to set up and slightly less know what it will cost in extra contributions. Despite this, 64% are confident or very confident of having the budget for set-up costs and 60% are similarly confident of having the budget for the extra contributions. The firm estimates set-up costs at £300,000 for systems, £120,000 for communicating the message, plus the cost of two full-time staff.

Which scheme to use

The ACA survey finds that 73% of employers are likely to auto-enrol all employees into their existing workplace pension scheme or schemes, with 21% proposing to auto-enrol into a new scheme. About 20% may restrict entry into the existing scheme and auto-enrol other employees into the National Employment Savings Trust (Nest) scheme. Between 5% and 7% are likely to close their existing scheme and auto-enrol all employees into Nest, or use Nest as a foundation scheme. Of those employers surveyed by the ACA that do not currently offer a pension scheme and that have addressed the new legal requirement, 25% are likely to use Nest and 11% to set up an employer's scheme.

The PMI/JLT survey, which seems to have been aimed primarily at larger employers and therefore did not consider the possibility of all employees being enrolled into a new scheme, finds that:

• 48.2% of respondents will use an existing scheme for all employees;
• 12.2% will use existing schemes for some employees and Nest for others;
• 5.6% will use an existing scheme for some employees and set up a new scheme for others;
• 1.5% will use Nest for all employees; and
• 32.5% are undecided.

Hymans Robertson's survey of large employers finds that 12% plan to use Nest. Apart from examining the popularity of Nest, it does not look at whether existing schemes or new schemes will be used, but rather at what type of scheme will be employed. The responses suggest that 30% will use trust-based defined-contribution (DC) plans, 29% contract-based DC plans, 7% a combination of these and 4% some other approach, while 18% are undecided.

Standard Life's recent survey places a question mark over how definite these policies are. It found that only 7% of large employers had made firm decisions about auto-enrolment. Furthermore, although 39% knew when they would be making a decision, 54% did not. More than half were undecided about contribution levels for new members being auto-enrolled, while 36% plan to keep contributions at their existing level and 5% indicated they would reduce contributions for new members.

Changing existing schemes

The survey run by the PMI and JLT reveals that at present 64.5% of schemes still require members to apply to join, with 30.2% enrolling automatically and 5.4% using some other alternative (probably either a combined process, or different processes for different groups).

The PMI/JLT survey also finds that three-quarters do not currently operate a waiting period, although the legislation is expected to allow a waiting period of sorts. Consequently, the survey report concludes, this is unlikely to be a major obstacle to those wanting to use their current schemes for auto-enrolment.

In total, 27% of employers responding to the ACA say they are likely to review their existing pension scheme benefits to mitigate the cost of greater scheme membership as a result of auto-enrolment, with this rising to 35% among the largest employers. The chart above provides more detail of the likelihood of "levelling down".

Overall, 35.4% of employers have discussed changes to systems and procedures with the scheme administrator, but 52.8% have not (with 11.8% recording a "don't know" response). About two-thirds of employers believe that rather more routine administration will be done online than is currently the case.

Impact on employers

According to Hymans Robertson's research, the major resource impact for compliance will fall on payroll systems. Furthermore, the three biggest issues that each employer believes are likely to crop up (all selected by 55%) are:

• costs of extra cash contributions from newly enrolled pension scheme members;
• ongoing administration costs post-auto-enrolment; and
• communicating changes to employees.

The PMI/JLT survey finds, rather unexpectedly, that only about one-quarter of schemes expect costs to rise, and rather more expect a cost reduction. The full breakdown of employer expectations is as follows:

• 5.7% expect a significant increase;
• 20.7% a marginal increase;
• 28.7% no change;
• 24.1% a marginal reduction;
• 9.2% a significant reduction; and
• 11.5% do not know.

The ACA survey finds that 26% of employers expect a significant increase in costs and 44% a marginal increase.

Employees' likely response

Legal & General's research, albeit among only 107 people who qualify for auto-enrolment, finds that 46% say they would remain in membership once auto-enrolled, while 33% would opt out, and 21% are undecided. This is a very slightly better result (in terms of remaining in membership) than its similar survey conducted four years ago: then, 44% said they would remain, 37% said they would opt out and 19% were undecided. Separate, qualitative research by Legal & General finds, unsurprisingly, that those aged between 22 and 30 will be the most difficult to convince, while those aged 30 to 40 are most likely to view auto-enrolment as the nudge to start the savings that they need.

Only 17% of Hymans Robertson's respondents believe auto-enrolment will be welcomed by staff, with 47% thinking it will not be welcomed and 36% considering that it will not make a difference.