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Pensions reform - A compliance exercise or opportunity

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Peter Glancy, Head of Corporate Pensions Propositions for Scottish Widows explains how a multi-tiered approach towards automatic enrolment might represent the best solution for employers.

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With the onset of automatic enrolment fast approaching, employers are faced with a number of complex choices that will have a direct impact on their business and their employees. Some may focus purely on meeting minimum compliance requirements and avoiding unnecessary fines, but with the help of their advisers, auto-enrolment could turn into a real opportunity. This article focuses on a couple of factors that can help businesses make the most of their pension arrangement.

Firstly, cash flow is critical to all businesses. However for many employers, automatic enrolment requirements will bring significant additional costs in terms of pensions contributions not previously accounted for. Employers will need help in planning and understanding their additional commitments. As employers are going to have to meet the cost of additional contributions, surely it would be the best use of money for employees to understand and value their employer’s contributions?

Secondly, quality employees can help give companies a competitive edge and that means attracting and retaining the right staff. Recent research from our 2011 Scottish Widows Workplace Pension Report highlights 56% of employees said their employer’s pension scheme is an
incentive to remain with that employer.

We also found that prospective employees value workplace pensions as more important than bonus, overtime, flexible working or a company car.

Employers therefore need to consider how attractive the pension scheme is to their employees when deciding on an automatic enrolment solution for their workforce.

The challenge and opportunity for advisers around automatic enrolment is to help each employer get the balance that’s right for them. In some cases this will be a ’one size fits all’ approach to pension provision. In other cases designing a multi-tiered pension arrangement for different elements of the workforce will be the optimal solution.

A multi-tiered approach can help maximise the appeal of an organisation to the employees the business most wants to attract and retain while minimising cost of compliance with the new regulations. Any sectioning of the workforce however needs to be done in a manner that’s non discriminatory.

Scottish Widows 2011 Workplace Pensions Report finds that too many employees still seriously underestimate how much they will need to contribute under automatic enrolment and some don’t expect to contribute anything at all.

These findings highlight the potential risk of high opt-out rates when people face contributions they were not expecting and do not understand.

Aignificantly the research also highlighted the 38% of those with a DC pension did not know how much their employer was paying into their pension plan!

Employers need to ensure employees are aware of the new legislation and the impact on them. This provides a great opportunity to engage employees on the importance of saving for retirement, remind them of any contributions already being made to their plan and the contribution levels the employer is prepared to make.

Our 2011 research also finds that as well as providing access to a pension, 40% of employees want their employer to provide access to advice and 55% expect general information and guidance about retirement. This requirement is only set to increase as the new pension reforms are implemented. Employees are facing a real challenge and employers need to be ready to provide their staff with the level of support required and expected.

A good pension scheme should provide access to education and guidance and focus on the best outcomes for employees at retirement. Too much focus is being placed on scheme charges, when in reality it is contribution levels that will have the biggest impact on an employee’s retirement income.

This highlights the need to rethink how employers evaluate a pension scheme. Maximising employee engagement and financial education can encourage more employees to join the scheme, contribute more, prevent opt-out and ultimately enjoy a better quality of life in retirement.

Peter Glancy
Head of Corporate Pensions Propositions,
Scottish Widows

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