The most common reason for companies not wishing to use the National Employment Savings Trust (NEST) to provide pensions under automatic enrolment is a belief that their own scheme can be more easily branded as a valuable employee benefit, according to employers who attended a Towers Watson seminar. Only a few respondents cited controversial restrictions on the cash that can be paid into NEST as the main reason for not using it; more said that they could get more attractive charges elsewhere.
Rudi Smith, a senior consultant at Towers Watson, said: “The fear for employers is that using a Government-backed scheme will make it look like they are just doing what they have to and that they will not get the credit for the extra money that they pay into employees’ pensions. That may not be fair – how much you pay and where the money goes are separate questions – but it is one more communications challenge that some employers might prefer not to have on their plate. As long as this perception remains, lifting the restrictions on NEST seems unlikely to see it swallow up the workplace pensions market for large employers in the way its rivals feared.
“NEST’s charges are generally competitive but some of the largest employers will be able to get a better deal if they do not cross-subsidise small firms. Some may also be put off by the fact that more of NEST’s charges are collected upfront: for every £100 of contributions, only £98.20 will get invested. NEST has, however, proved an attractive proposition for several large firms: one fifth of employers at our seminar plan to use it for at least some employees.”
At the seminar, Towers Watson took the pulse of 50 mainly large employers, which must start enrolling employees in the next few months. Half of those employers thought that no more than one in five of the people they enrol would opt out, while only a few expected opt-out rates to exceed 60%.
Rudi Smith said: “Where automatic enrolment is already used, the evidence is that a large majority of employees stay in the scheme. There is a world of difference between deciding that you won’t fill in the membership form tonight and declaring that you do not want to save for retirement and are happy to give up the employer contribution. The Government’s ‘I‘m in’ advertising campaign is also trying to make pension saving look like the social norm that it should be.
“When auto-enrolment was dreamt up, pay was rising faster than prices. It is being implemented at a time when wages have been failing to keep pace with the cost of living. That may increase opt-outs a little, but inertia is a powerful force and a lot of people recognise that the financial problems they have today could be a lot worse in retirement.
“Some large employers may reasonably expect higher initial opt-out rates where the people they are enrolling have been given a strong nudge towards pension saving in the past and decided to come out.“
Towers Watson also found that almost half of employers said they would enrol a wider group than just people who are eligible for automatic enrolment under the legislation – those aged between 22 and State Pension Age who earn at least £8,105 a year. This includes over a quarter of employers who said they would enrol everyone.
Rudi Smith said: “People should not conclude that they definitely won’t be enrolled just because they’ve heard that they are not old enough or not earning enough. Some employers prefer to treat all employees in the same way. The automatic enrolment legislation only authorises employers to put people into a pension scheme if they satisfy the eligibility rules. Employers wanting to go further need to check that people’s contracts of employment allow this.”
Only a few of those attending the seminar said they expected to cut contributions for existing employees to help offset the cost of providing pensions for more people. However, around two-fifths said they would enrol employees who are not already members at lower contribution rates than have previously been available, including around a third who said they would enrol people at the minimum rates permitted.
Rudi Smith said: “Most employers only closed their final salary schemes to new members, but staff turnover has meant that fewer and fewer people are still in these schemes. Fast forward a few years, and there could be a similar picture in workplaces where anyone joining after auto-enrolment receives a lower contribution rate. However, as many defined contribution schemes have matching scales, employees will often have the opportunity to benefit from higher employer contributions if they are prepared to save more themselves. A low contribution rate may be the default position, but there will frequently be better items on the menu for employees who signal that they value pensions.”