CA Magazine

by Robert Outram

Monday 3 October 2011

Saving for the future has always been a contentious issue but, with the government now set to shake-up pensions with auto-enrolment, Robert Outram looks at how businesses are preparing for change

With preparation for the move to auto-enrolment well under way, the pensions industry is bracing itself for yet another round of significant change. Employees, if they have not positively opted out, will be placed in a pension scheme; and employers will have to arrange for this retirement provision, and communicate the implications of the choice to their employees.

CA Magazine, in association with leading law firm Biggart Baillie LLP, brought together a panel of experts to discuss the key issues, and to ask whether there is a better way to deal with the need for citizens to save for their old age, something that is becoming a massive challenge for governments.

Chairing the meeting was June Crombie, a partner with Biggart Baillie LLP. She asked the panel: "How can employers - within the constraints of their own business model - help their employees to save for retirement? What do businesses need to do, now, to be ready for the introduction of auto-enrolment?"

Alan Steel, chairman of Alan Steel Investment Management, said: "I don't think it's up to employers - it's up to government."

He added: "As far as auto-enrolment is concerned, the information we are getting from clients is that they are looking at cutting down their contributions to the statutory minimum level of 4 per cent and I think that's a bad thing.

"It's astonishing how few people make it through to retirement without a decent amount of money, and I don't see that this will make it any better."

Jim Doran, principal with benefits consultancy group Mercer, did not agree this was a lost cause, however. He said: "I am a fan of auto-enrolment. The contribution rates as set out aren't necessarily going to guarantee a comfortable retirement, but if the experience of the UK mirrors the experience of, say, Australia or Chile, gradually, over time, those rates will be legislated upwards."

Would that change involve compulsory retirement saving? Doran said: "If the experience of auto-enrolment is that a lot of jobholders opt out, then Government will almost certainly introduce compulsion."

Donald Fleming, partner with KPMG in Scotland and a pensions specialist, said that many employers are now being forced to spend too much time on retirement benefit issues. He said: "Employers need to consider their options for managing pensions issues and keep the time required proportionate. Careful planning for auto-enrolment will help with this."

Andy Scott, an actuary and principal with consultants Punter Southall, expressed his concerns as a father of three children in their 20s and 30s, none of them in a pension scheme. He said: "Even with auto-enrolment they not going to build up enough for their retirement."

Alan Steel argued that successive politicians, ever since Keith Joseph (Conservative) and then Barbara Castle (Labour) back in the 1970s, have generally made the problem worse. He said: "Millions of people have been short-changed by governments kicking it up and down and by hare-brained ideas. People eventually think: 'Why should I bother, because they just keep changing the rules?'

"So, generation after generation are badly advised, mis-sold to and they don't understand tax or pensions. I'm not convinced about auto-enrolment - I think 20 year olds will opt out."

But, Jim Doran pointed out: "In our 20s we would probably not have opted in, but if our employer put us in a scheme we stayed in it."

Alan Steel agreed but added: "We didn't have the right to opt out, though. I think it should be compulsory that you are a member of the organisation's pension scheme."

"Compulsion would take out a lot of the expense and rigmarole of auto-enrolment," Colin Greig suggested.

"Realistically," Donald Fleming said, "when you are 25 you would rather go to Ibiza than put money in your pension fund."

The panel discussed how best to raise individual awareness of pensions issues.

Gill Hunter, a financial planning manager with Grant Thornton, said: "There has to be education in the workplace. We found the take up of pensions was much better after we ran seminars on how a pension actually works. People are very cynical, but if you sit down and explain it to them they can see the benefits."

Alan Steel said: "One of the things that upsets me is the media spreading fear over mis-selling. Journalists are quick to criticise the industry and the industry isn't fighting back."

Discussion turned to the abolition of the "default retirement age" and the advent of flexible retirement. Is this creating problems for employers?

June Crombie said that in her experience, many employers have, until recently, put this issue to one side because they do not have an employee immediately approaching retirement age. That, she argued, would be a mistake as there are complex issues to work through.

The employee's right to carry on in a job could be problematic, Andy Scott said, adding: "You virtually can't stop someone from saying 'I don't want to go'. What are you going to do with an 88-year old fireman?"

Colin Greig, a partner with Biggart Baillie LLP, said: "Employers will have to beef up their HR support and look at how they monitor performance, with a view to making sure the people who are working for them are the appropriate people."

Fraser Smart, UK managing director with Buck Consultants, agreed but added: "In the real world, however, they are not working that way right now. There is a mental recalibration necessary. 'Retirement age' should depend on the nature of the work, not just the individual's age in years."

Donald Fleming asked: "If they are doing a good job, what's the problem? If they're not, there's a process you've to go through."

But Paul Provan, assistant director, business policy with ICAS, warned: "If you don't go through that process diligently, the employee can say, 'it's because of my age...' and claim for discrimination."

The panel also discussed whether fund investment performance could match up to the assumptions of the life companies and the illustrations - in terms of illustrative figures that the regulators insist on.

Alan Steel argued the figures set by the regulators and the classification of investments as "high risk" and "low risk" were based on unrealistic assumptions.

Careen Gray, a director with Ernst & Young, added: "Confusion over the charging structure is also a factor, because some of these products are very complicated."

Employees under auto-enrolment will also have the choice to pick either the employer's "default fund" or select their own preferred mix of investments.

Andy Scott said: "People prefer a default fund when they are in a DC [defined contribution] scheme, rather than having to select what percentage goes, say, into overseas equities."

But Careen Gray stressed: "The onus is on the employer to keep monitoring the default fund, to ensure it is still the right fund for their employees. There is a real expectation that what the employer is offering must be good."

June Crombie speculated there is likely to be a growth industry in pursuing "employer mis-selling" once the new system is in place, if employees feel they have been led to invest their retirement investment in an inappropriate fund.

June Crombie then asked the panel to consider the role of The Pensions Regulator, which was, she said, expanding its role to look, increasingly closely, at DC schemes.

Paul Provan agreed: "The whole DC sector is going to get a bit of a shake."

Donald Fleming argued the regulator's shift in emphasis was inevitable: "The more DC schemes there are, the more likely it is something will go wrong and then there will be more knee-jerk legislation on the back of it."

But Careen Gray said: "The regulator now has responsibility for making sure the new workplace pension reforms are happening in the way they should be. Particularly in some of the smaller schemes, there is a need to improve governance and there have always been issues around accountability and conflicts."

Fraser Smart, in contrast, said the concentration on small schemes is mainly because they represent an "easier target", even though some large schemes are also badly governed.

Punter Southall's Scott said: "The regulator is still very concerned about governance in DB schemes. He has a duty to stop companies going bust and the schemes going into the Pension Protection Fund [which exists to compensate scheme members when the employer becomes insolvent]. The PPF, in turn, is concerned about both 'sharks' - poorly run large schemes - and 'piranhas', that is the many small schemes where there are problems."

"How did we get into this mess?" Alan Steel asked. "Final salary schemes actually worked, but a series of ill-conceived pieces of legislation, much of it from Europe, brought them down."

"Legislation hasn't been kind," Jim Doran conceded, "but a lot of it was down to financial realities, and whatever regulatory framework you put around that, there are going to be problems."

"Legacy" direct benefit (DB) schemes can represent an ongoing liability for employers, even after they have been closed to new entrants. So how can businesses "de-risk" these schemes?

Donald Fleming said: "Once the link with the current workforce has been broken, it becomes a different ballgame. It becomes, in some ways, easier to address because a lot of sensitivities around DB schemes are to do with the relationship between the employer and the current employees. It's easier with a legacy scheme."

"Most trustees and most employers would like to de-risk," Jim Doran said, "But they don't have a plan as to how they are going to do it."

Alan Steel said: "The money required for a buyout is astronomical... I don't see any easy way out."

Fleming argued that the scale of the problem is linked to the relationship between the size of the business now and the size of the "legacy" deficit. He added: "If it is large, you may end up as one of the FDs who spends half their time on pension issues. For some schemes there is an increasing likelihood professional trustees will be put in place, and it becomes an exercise in managing the scheme through to its conclusion. You are running things down and you want to do that in as controlled a way as possible."

Jim Doran said: "It's hard to maintain a long term plan, because it depends on your investment returns and on how the business itself performs." He added that some observers believe there may not be enough gilts available to enable the buy-out of the remaining DB schemes.

Andy Scott said: "Some companies - a minority - just want to get rid of the problem, and they will pay over the odds to get rid of it."

Gill Hunter said: "There has to be an acceptance on the part of employees, including those in the public sector, that you just cannot have the pension you were promised."

The panel also discussed the argument The Pensions Regulator itself has a potential conflict, in that it has an interest in keeping a troubled pension scheme going rather than letting it become a liability for the PPF.

Fraser Smart said: "It seems morally wrong to keep schemes limping along on 'life support' to protect the PPF, when you know the company is inevitably going to hit the buffers at some stage."

Andy Scott argued, however, that the PPF plays a vital role when a company becomes insolvent and people who have contributed to a pension all their working lives would otherwise stand to lose everything.

He said: "There's a loss of protection for the employer, but more protection for employees."

Fraser Smart added: "I do believe in helping people commit to long term savings and I would like to see an environment that encourages people to help them go from managing debt when they're young, to short term saving and ultimately long term saving. Compulsion to pay eight per cent into your pension doesn't deal with any of the other issues."

The debate about pensions, clearly, cannot easily be disentangled from a wider set of questions, about how we approach financial planning, consumer education and the need for individual self-reliance.

Pension wish list: What changes would the panel like to see

"A single rate of tax relief on pension savings, with basic, high and additional tax rates harmonised in a fiscally neutral way, so that basic rate taxpayers - who are not saving enough - gain extra tax relief, financed by the higher and additional rate taxpayers geting less." Jim Doran and Paul Provan

"A standard grade/GCSE in financial planning, including pensions." Donald Fleming

"Education - not just in schools, but for employers, employees and the government itself. We need to express the facts in a simple way and the industry should lead the way." Andy Scott

"Support for employers to educate their staff about the need for retirement planning." Gill Hunter

"Simplifying the existing pensions legislation." Colin Greig

"More certainty over what the individual will get from a DC pension." Careen Gray

"Make fewer and less frequent rule changes, and allow everyone to have as much in their fund as they can build, but with a limit on how much cash is going to be tax-free." Alan Steel

Article courtesy of CA Magazine
Monday 3 October 2011