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Achieve 93% &#39compulsion&#39 automatically

The Pickering report proposes that an employer should be allowed to make it a condition of employment that a new employee joins the pension scheme. It also notes that both the CBI and TUC have indicated support for such change. This is powerful backing.

The proposal depends on immediate vesting and extension of concurrency above £30,000 so there is a lot of water to flow under the bridge before it is clear whether this can become law. On top of this, there is the time that it takes to change the law. Yet, if an employer wants it, 93 per cent private pension compulsion can be achieved today. Here&#39s how.

If you look at the most recent annual survey by the National Association of Pension Funds, you will see that there is 92 per cent take-up for final-salary schemes with automatic entry and 93 per cent for money-purchase schemes with automatic entry. These big schemes are already achieving 92 or 93 per cent of what compulsion advocates are campaigning for. They do this by putting the onus on new employees to say if they do not want to join the scheme.

Pension providers are now making it easy for employers with insured schemes – whether occupational, group personal pension or stakeholder – to do the same thing. Software is widely available which will make new employees members of the scheme without them having to fill in an application form. The employer should, however, get each employee to sign an authorisation form. This gives the employer a mandate to apply for a contract on the employee&#39s behalf (where the scheme is a GPP or stakeholder), authorises salary deduction (where the scheme is contributory) and authorises the employer/IFA to handle data in the context of the Data Protection Act.

The big pension schemes achieving 92 or 93 per cent take-up are mostly contributory and are clearly not finding the employee contribution or authorisation signature to be a barrier.

The contracting-out position of the new employee who makes no conscious decision depends on the nature of the scheme being joined. If it is a non-contracted-out occupational pension scheme, a stakeholder or personal pension, the default is not to be contracted out. If it is a contracted-out salary-related scheme, the default is to be contracted out. Comps are more complicated but are now very thin on the ground.

If the new employee makes no conscious decision in this whole joining process, money-purchase contributions would go into the default fund. If the new employee earns more than £30,000 and the employer operates an occupational pension scheme, it may be worth telling the person that he or she cannot (yet) pay in to a stakeholder or personal pension. If the scheme is a GPP, the employer&#39s contribution must be at least 3 per cent in order to avoid having to offer stakeholder as well.

What the IFA needs to do is identify which employers in the client bank really care enough about employee pensions to want to make joining automatic. It can be deduced from the NAPF survey that around half the final-salary employers surveyed did compared with about 40 per cent of the money-purchase employers. These proportions may be a little higher than the proportion of small and medium-sized employers which might be willing to use automatic entry but the potential gains in take-up rates are significant.

For money-purchase employers in the NAPF survey which do use automatic entry, take-up is 93 per cent compared with 69 per cent for those which do not. That is a whopping one-third increase.

This sounds pretty close to an ideal outcome – a big majority of future employees enjoy a good pension accrual or (hopefully) a decent employer contribution, the employer has the satisfaction of having done the right thing and the adviser and provider enjoy strong incremental business – all with minimal red tape and without any change in the law.

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