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Stewart Ritchie on pensions

One way to simplify pensions would be for new employees to automatically join the pension scheme. At the moment, it would not be legal to compel new employees to join or indeed to compel employers to make joining automatic but the Government can get very close to this and probably will.

Its motivation is not primarily simplification but to get greater private pension coverage among employees. The fundamental principle is to make inertia work in favour of pension provision whereas at the moment inertia often works against it.

There is plenty of evidence that auto-enrolment works. My own company has offered this as an option to employers and their advisers for some time. Where it is used, the take-up rates are usually very high. The NAPF in its annual survey monitors take-up rates separately for auto-enrolment and where the new employee has to make a conscious decision to join. The difference in average take-up rates between the two categories tends to be around 30 per cent of new employees.

If auto-enrolment is so wonderful, why don’t all employers use it? Many of us suspect the answer is that, secretly, a lot of finance directors are pleased when a lot of new employees do not join because it saves on payroll costs – employers do not contribute for employees who do not join the scheme. Those employers which do use auto-enrolment presumably believe it is in the best interests of their employees generally to do so. For this to be true, there needs to be a decent employer contribution.

Most legal advice concerning auto-enrolment seems to suggest that the signature of the new employee should be obtained somewhere in the process. This is particularly so if there is an emp-loyee contribution to be deducted from pay. But it may be possible to put this in to the acceptance terms for the new job, with an additional separate form having to be signed if the individual does not want to join the pension scheme.

My suspicion is that the Government will give employers a choice – “either provide a decent pension scheme or pay for your employees to be told the implications of you not providing a decent pension scheme for them”. In this context, I expect that “decent” would be defined not just in terms of the size of the employer contribution (or accrual rate if defined benefit) but also in terms of take-up rate – and the easy way to get a high take-up rate over time is by using auto-enrolment for new employees.

The Finance Act 2004 has already paved the way for this carrot and stick approach to employers by exempting 150-worth of pension information and advice from a benefit-in-kind income tax charge on the employees, provided the advice is available to everyone. This sounds like wonderful news for pensions IFAs because either the employer will offer a decent pension scheme or there will be a requirement for fee-based advice in the workplace.

The IFA wins either way, especially since the new opportunities will largely arise in their traditional territory of small and medium-sized employers. Large employers tend to provide decent pensions already.

The Government is looking at the way the US carries out auto-enrolment. In the US, they have a variant of this which involves an employee agreeing in advance to commit a certain amount of future pay rises to higher pension contributions on the principle that you do not miss what never enters your pocket in the first place. This variant only works if the employee is sold on the idea of responsible pension provision, whereas the main auto-enrolment concept merely requires inertia.

It would be great if every employee accepted the idea of responsible pension provision but in the meantime, auto-enrolment with a decent employer contribution is the next best thing.

Stewart Ritchie is director (pensions development) at Scottish Equitable


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