The best thing about the Pensions Regulator’s Duties Checker is the process. “Follow the five steps and you will be able to sign your declaration of compliance and that’s it- auto-enrolment sorted”.
Well if only it was that simple.
Implementing auto-enrolment into your payroll workflow is tough but already over half a million employers have done it – it’s getting easier as payroll software companies de-bug their auto-enrolment modules and as employers get smaller and simpler in structure.
But the importance of your workplace pension is going to grow with every contribution you and your staff make to it. And the pension will come under more scrutiny as employee contributions increase from 1 to 4% of earnings. Infact, some experts say that when your pension pot is worth more than the cost of your car, then people really start to ask questions.
It’s not the person owning the pension pot who gets to make the big choices … it’s their employer
Not just the odd person mind- there are 9m of us who will be first-time pension savers as a result of auto-enrolment. All these people will, at some point, have to pay attention to their pension, if only to choose how to spend it!
From tiny acorns…
What seem inconsequential issues at outset, like the cost of the pension or how the money is invested, become hugely important later in someone’s career. For instance, the cost of a 1% charge on your pension pot of £100 is £1, but that cost rises to £1000 when you’ve built a pension pot of £100,000. The impact of losing £1000 a year in charges to your final pot in 40 years time is huge.
Even more important is investment performance which can add or subtract 2 or 3% per year to your pension.
Then there’s the quantity and quality of help you get from your pension provider not just at the start but throughout the time you have your money invested with it.
But here’s the scary bit…
It’s not the person owning the pension pot who gets to make the big choices … it’s their employer. Over a million employers will have to choose a workplace pension for their staff in the auto-enrolment staging period. The quality of those decisions will vary, some employers will get it right and some will get it wrong and you (as an employer) can make sure that the chances of you getting it right are massively improved by paying attention to the pension.
Legally this is called conducting due diligence; there are a number of services set up to help employers complete due diligence.
Some are targeted at business advisers (accountants, payroll bureau and IFAs). Examples are F&TRC and DeFaqto.
Some are targeted at these advisers and directly to employers. Examples are Husky, Pension PlayPen and Pension Counter.
You may have already conducted due diligence and are reading this smugly. But while you may know you made every effort to pick your pension sensibly, does anybody else?
In ten, fifteen or twenty five years time – will anyone remember that you paid attention to the choice of the workplace pension? Most employers who choose a workplace pension have no idea why they chose the pension that they did.
Many employers we speak to say they did what their accountants or financial advisers told them to do.
Some say they chose NEST because it was the Government scheme and no one can be blamed for going with the Government
Others may have looked into things in more detail but kept no record of their researches and soon find it hard to remember the basis of their decision.
The importance of an audit trail
Well we all remember what we were taught at school “SHOW YOUR WORKING”. IFAs are used to delivering clients a “reason why” letter that explains the decision in simple terms. Ironically, there is no such obligation on employers and, while the Pensions Regulator encourages documentary evidence, the declaration of compliance contains nothing on the reason for the workplace pension choice.
Many experts see this as a flaw in the auto-enrolment regulations. Others see it as the opening that class action lawyers may be looking for. There is plenty to go wrong with a workplace pension from accidentally denying low earners tax-relief to offering a dog of an investment default.
But beyond the compliance risks and the opportunity for class actions there is the opportunity cost to employers of failing to delight staff. This author is in the final years of his career and in the process of reviewing the various workplace pensions he has participated in. Some have provided a great return, others have failed to deliver. It is interesting to understand the reasons why.
Experience suggests that employers that have engaged the author with good communications (including proper promotion of the workplace pension itself, have encouraged higher contributions and greater engagement with the features of the pension.
The return on the employer’s investment was greater where the author sensed that the pension scheme had been chosen with his interests in mind (rather than to satisfy compliance)
And why’s this so important?
The litigation over PPI is still running. Banks and other financial institutions have had to write off hundreds of millions of pounds in redress to people who bought a product without knowing why they were buying or whether it was value for money.
The analogy with the inertia sale of workplace pensions is obvious. But this time, it is not just the purchaser who could be seeking redress. Employers purchase on behalf of staff and if they purchase blind then they may find themselves answerable not just to current staff but to those who over the years entered into the pension schemes with the same blind loyalty.
The OFT pointed out that individuals purchase pensions foolishly and this is partly because pensions are complicated. But it appears that the individuals who purchase on behalf of others are no better at the job than individuals purchasing for themselves.
To break the cycle of poor purchasing, we need to raise the value of doing due diligence or paying third parties to do it on our behalf.