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Pension Reform - People Vision
- 1. Workplace Pension Reforms – Doing nothing is not an option Webinar with Alyson Pellowe (People Vision) and Simeon Adams (Argentis Financial Management)
- 6. Timescales Unless you are unlucky! Number of PAYE staff Staging Date 50,000+ Q4 2012 10,000 – 49,999 Q1 2013 4,000 – 9,999 Q2 2013 1,250 – 3,999 Q3 2013 500 – 1,249 Q4 2013 250 – 499 Q1 2014 90 – 249 Q2 2014 50 – 89 Q3 2014 < 50 Q3 2014 – Q1 2016 New Employers Q1 2016 – Q3 2016
- 7. Employee group Employer requirements Entitled Worker Earnings under lower threshold (may be £5,715 or NI threshold - currently £7,228) Must offer access to a pension scheme, but no requirement for employer to contribute Non Eligible Job Holder Earnings between lower threshold and Income Tax threshold (£7,475 in 2011/12) No automatic enrolment, but employer must contribute if individual asks to join Non Eligible Job Holder Age under 22 or over state pension age and under 75 No automatic enrolment, but employer must contribute if individual asks to join Eligible Job Holders All other employees Must be automatically enrolled
- 8. Contribution bases *Based on 2010/11 earnings levels and National Insurance thresholds Phasing-in period until October 2017 Who is going to do this analysis? Employer minimum Minimum total Full pensionable earnings 4% 9% Band earnings (P60 earnings £5,715 - £38,185) * 3% 8% Full pensionable earnings, and at least 85% of payroll is pensionable 3% 8% Full P60 earnings 3% 7% At least basic pay, from pound one. Basic pay is “the elements of pay that do not vary”.
- 9. What about phasing of contributions? Contributions are based on total PAYE earnings between £5,715 & £38,185, increased in line with National Average Earnings, (2010/11 terms) Employer Employee Tax Relief Up to 10/2016 1.0% 0.8% 0.2% 10/2016 – 10/2017 2.0% 2.4% 0.6% 10/2017 onwards 3.0% 4.0% 1.0%
- 10. Waiting Periods Recommendation Employers be allowed to use a waiting period of up to three months before automatic enrolment Individuals are allowed to opt in to the scheme during that time.
- 15. Penalties Compliance/unpaid contribution notice Stage 1 - Warning Fixed penalty - £400 Stage 2 – ‘Wake up call’ Escalating penalty Workers Penalty per day 1-4 £50 5-49 £500 50-249 £2,500 250-499 £5,000 500+ £10,000 Stage 3 – Persistent offenders
- 16. Penalties Third parties £400 fixed £200 per day escalating Prohibited recruitment conduct Workers Fixed penalty 1-4 £1,000 5-49 £1,500 50-249 £2,500 250+ £5,000
- 17. NEST (National Employment Savings Trust) - A centralised occupational scheme - Administered in private sector - Low charges 1.8% upfront and 0.3% pa administration - Limited investment choice - A small range of funds, including ethical & religious - ‘Target date’ approach rather than lifestyling - Restrictions to help target scheme - Contribution limit £4,200 until 2017 - No transfers in or out until at least 2017
- 20. Nest vs. Private Provision Nest Private Provision Suitable for low value schemes? Simple Government publicity campaign Low charges One scheme for all employees Commission or consultancy charging Tailored communication material Adviser support
- 21. So what does it all mean for employers?
- 22. Employers Concerns Source: making auto enrolment work, October 2010 HELP!
- 30. “ Thank you for participating, we look forward to your feedback!”
Editor's Notes
- So how does all this impact on the individual pension market? Well existing clients who are eligible employees will be enrolled into the new schemes – in order to be in the scheme they are likely to have to make a contribution to the plan and many of these clients will not want to or be able to afford to contribute to their existing plan and the new employer arrangement that they have just been enrolled into. If they can only be in one then the sensible one to be in is the one that the Employer is contributing to. So undoubtedly there will be a reduction in regular premiums to Personal Pension Plans Not only will there be clients stopping contributions to existing PPP’s there will also be a reduction in new clients in the future as every qualifying employee will be enrolled into an employer arrangement – even if they opt out of the scheme the first time round the employer has to re-enrol them every 3 years into the scheme. In Scottish Widows own book – over half of our individual pension clients are employees these contributions are clearly at risk – ask them if this is something they have thought about for their own business and is it something they are building into planning? It also has some inherent risks for the corporate market Existing schemes may decide they would rather have a new low cost Nest scheme rather than their existing scheme – remember the government has always planned to spend money advertising this new arrangement – whether they will have the money left to do it is anybody’s guess but they probably have a moral duty to make sure there is high public awareness so that Employers cannot claim they were not aware and Employees have some understanding of what their employer is doing when they put a Nest scheme in place On top of this the contributions to many schemes are higher than the minimum levels under Pension Reform and there is a concern that the government has set a new benchmark in pension scheme funding and that 8% aggregate will become the norm with the Employer contributing only 3% - many schemes are much more generous than that just now in fact the DWP report published in 2007 found that average scheme contributions were Average DC contribution is 6% Employer and 3.7% Employee but very much dependent on scheme type (Source:DWP: Employers attitudes and likely reactions to the workplace pension reforms 2007)
- So how does all this impact on the individual pension market? Well existing clients who are eligible employees will be enrolled into the new schemes – in order to be in the scheme they are likely to have to make a contribution to the plan and many of these clients will not want to or be able to afford to contribute to their existing plan and the new employer arrangement that they have just been enrolled into. If they can only be in one then the sensible one to be in is the one that the Employer is contributing to. So undoubtedly there will be a reduction in regular premiums to Personal Pension Plans Not only will there be clients stopping contributions to existing PPP’s there will also be a reduction in new clients in the future as every qualifying employee will be enrolled into an employer arrangement – even if they opt out of the scheme the first time round the employer has to re-enrol them every 3 years into the scheme. In Scottish Widows own book – over half of our individual pension clients are employees these contributions are clearly at risk – ask them if this is something they have thought about for their own business and is it something they are building into planning? It also has some inherent risks for the corporate market Existing schemes may decide they would rather have a new low cost Nest scheme rather than their existing scheme – remember the government has always planned to spend money advertising this new arrangement – whether they will have the money left to do it is anybody’s guess but they probably have a moral duty to make sure there is high public awareness so that Employers cannot claim they were not aware and Employees have some understanding of what their employer is doing when they put a Nest scheme in place On top of this the contributions to many schemes are higher than the minimum levels under Pension Reform and there is a concern that the government has set a new benchmark in pension scheme funding and that 8% aggregate will become the norm with the Employer contributing only 3% - many schemes are much more generous than that just now in fact the DWP report published in 2007 found that average scheme contributions were Average DC contribution is 6% Employer and 3.7% Employee but very much dependent on scheme type (Source:DWP: Employers attitudes and likely reactions to the workplace pension reforms 2007)
- 8.4.1 Waiting periods There is a range of arguments for proposing a waiting period as a way of reducing regulatory burdens: Removing high churn workers who represent a high administrative cost to employers for relatively small contribution gains. Allowing employers more time to complete all the processes involved in automatic enrolment. Allowing employees more time to decide whether they want to stay in the scheme or not, especially those on weekly pay. Stakeholders have also linked a waiting period to the option of allowing employees to opt out before they are put into a pension scheme, citing this as a further way to reduce administrative burden. We have considered this option separately in Chapter 6. However, on balance we are not minded to recommend this option. If we want a waiting period primarily to remove the burden of processing high-churn employees, this would lead us to a reasonably long waiting period. By contrast, if we are simply looking for an administrative easement to allow employers more time to complete automatic enrolment processes, then allowing an extra month or so flexibility may be sufficient. We feel that all of these reasons are important, and therefore examined a waiting period of up to three months. We feel that the most crucial points to consider are: Pros A waiting period prevents employers from having to enrol and then un-enrol temporary workers. We feel that this nugatory work could otherwise undermine the credibility of the reforms. Out of around two million enrolments per year in steady state, 190,000 enrolments are for employees who leave within three months.84 Allowing employers the flexibility to select an automatic enrolment date any time within a three month period enables them to align this activity with their existing payroll cycles. It also reduces the likelihood of the employee failing to return the opt out form before contributions are deducted, reducing the risk that refunds will have to be paid. A waiting period may mitigate the risk of employers choosing to use trust-based schemes to make use of rules for short-service refunds, which would result in poorer outcomes for savers. 84 Source: Labour Force Survey 2007. Figures based on people in the target group who had started a job within the previous 12 months. 160 Chapter 8 Trade-offs and recommendations Employer and industry representatives have universally called for a waiting period as a means of easing regulatory burden. Cons Consumer and employee representatives are against a waiting period as it risks excluding high churn workers from pension saving. On any particular day, 400,000 individuals would not be eligible for automatic enrolment due to the waiting period. Some employees may never access pension saving, if they work on short term contracts for the majority of their career. Even for those who are eventually enrolled, the average saver could lose up to three years worth of pension contributions over their lifetime. Replacing the easement only for “good quality” schemes with a universal waiting period, risks undermining the current benchmark for a “good scheme”, with an associated risk of levelling down of existing provision. On balance we feel that a waiting period strikes a reasonable balance between regulatory easement, particularly for smaller employers, and the risks to individuals’ savings. However, in recognition of the impact on some individuals, we recommend that eligible employees be allowed to opt in to the scheme during the waiting period. We discussed whether to couple a universal waiting period with a longer postponement option for higher quality schemes to give employers with such schemes an additional easement. This may help to maintain a higher benchmark for defining good quality schemes. Overall, however, we concluded that the universal three month waiting period is sufficient to resolve the issues of employer churn. Recommendation: Employers be allowed to use a waiting period of up to three months before automatic enrolment; individuals are allowed to opt in to the scheme during that time. This replaces the existing postponement arrangement for employers using higher quality schemes.
- DWP is taking employer compliance very seriously. The Pensions Regulator have been given the scope to police employers who will face hefty penalties for failure to comply with their duties. TPR will firstly issue compliance notices to employers where they are found to be in breach of any of the auto-enrolment regulations. If they do not comply by rectifying the breach, tPR can issue a fixed penalty of £400. If the employer still fails to comply and/or persistently does so, tPR can issue an escalating penalty notice which increases daily and will only stop increasing when the breach is sorted out to the Regulator’s satisfaction. The penalties will be scaled based on an estimate of the amount of jobholders affected by the breach. Where any breach is in respect of unpaid contributions, the actual amount of jobholders will be taken into account, where available, and the penalty scaled accordingly. In addition to any penalties, tPR have the power to demand that the unpaid contributions due, plus interest, must be paid by the employer. The Regulator plans to use the information that employers are required to give the Regulator and the provider to detect possible breaches and can investigate cases where employees ‘whistleblow’. It’s worth noting that these penalties can be applied where employers fail to comply with any aspect of the regulations – for example, failing to: provide the statutory information to jobholders, provide information to the provider or scheme trustees, auto-enrol eligible jobholders keep adequate records. Although TPR are responsible for the employer compliance regime, they will use their powers to outsource the actual mechanics of targeting and fining employers to third party public or private sector companies.
- IN ADDITION to the penalties noted on the last slide, the DWP take prohibited recruitment conduct more seriously as they see this as a more serious risk to the desired outcomes of auto-enrolment. As such the penalties are dealt with by separate regulations and are shown in the table above. Third parties – such as pension providers, professional advisers and trustee boards - can also receive fines as per the slide where they are found in breach of the regulations as they apply to them (e.g. record keeping), if they have failed to comply with a ‘third party notice’, or if they are found to have contributed towards the employer’s failure to comply. For any penalties which tPR issue, there will be an underpinning review process in place. Thos issued a notice can ask tPR to review their determination, within 28 days of receiving the notice. Source: http://www.opsi.gov.uk/acts/acts2008/ukpga_20080030_en_1 http://www.opsi.gov.uk/si/si2009/pdf/uksi_20091888_en.pdf
- Choice of investment funds – likely to be vanilla or vanilla Self investment will not be an option, remember that self investment in a GPP can involve share ownership through SIP/SAYE rollover and the flexibility to do things like access your tax free cash from the plan whilst still working We pride ourselves on our communication material, and for those big schemes our ability to bespoke the message to fit with the company aims and values. We can add value and fine tune the communication material to help ensure that the Employees feel they are being provided something of value by their employer. Personal Accounts is seen as something which Employers are being forced to do because they have been unwilling to provide good benefits for members in the past. As there is a cap on contributions – if an 8% contribution was being provided to all the employees anyone earning above £50k would be exceeding the contribution limit and would have to pay their contribution elsewhere. PA is never going to be the scheme of choice for high earners Recognisable Brand 4 companies have been shortlisted as potential suppliers of personal accounts Logica UK Arbejdsmarkedet Tillagspension (Danish) Great-West Retirement Services (Canada Life/Group and Great West Life…) Tata Consultancy Services (Indian conglomerate) Only one of them is a recognisable brand in the UK Adviser Support – The existing Group Pension Arrangements have the adviser very much at the core of the relationship. Providing support to the employer and acting for the employer with the current provider. There will be no such relationship when dealing with Personal Accounts – it is a leap of faith and will be a major distraction for many companies.
- Even ignoring that the recent change in NI rates has made salary exchange even more attractive – the figures above assume that the employer has no change in costs and the employee has no change in take home pay – all that is happening is the contribution is paid through salary exchange rather than the normal net pay method. Those who earn just above £100k have also the potential to get large benefits from pension contributions – up to 66% relief because of the effect of getting their personal allowance back.
- What we’re going to cover today.