A British manufacturer has raised concerns about how the greater retirement flexibility announced in the Budget will impact the success of workplace saving and auto-enrolment, saying employees will need more help to navigate the system.
AE approach
Even though the James Walker Group has sites around the globe, it wanted to maintain a “paternalistic” view when structuring its UK auto-enrolment offering.
Two years of research went into the project and the company saw auto-enrolment as an opportunity to standardise its pension offering, Collins said.
Each subsidiary carries out its own HR and payroll functions, which presented a challenge for implementing the reform, Collins said.
One scheme staged in November 2013, three will stage this month and another will auto-enrol from October.
The company previously had two defined benefit schemes, which closed to new members in 2001 and were replaced by a stakeholder arrangement. Two DC schemes were later introduced, replaced by a group personal pension provided by Legal & General as its main AE solution.
To make the changes easier to communicate, and to help avoid additional work down the line, it decided to skip the auto-enrolment phasing stages by putting in place an employee/employer contribution rate of 5/4 per cent, respectively.
The majority of those enrolled have remained in the scheme’s default fund. “They felt safe there,” Collins said.
This is in part indicative of people’s lack of understanding or confidence around pensions, which could be exacerbated by the Budget’s added choices at retirement, Collins said, adding more needs to be done to help members.
“As an employer, I see this very much part of our responsibility in conjunction with the pensions industry.”
Collins also said a viable replacement for annuities is necessary, as “we still need risk reduction in retirement”.
A lack of certainty around retirement outcomes has led several employers to explore ways of either upping member saving rates through auto-escalation or incorporating implicit guarantees into their DC structures.
Tricia Collins, group company secretary at manufacturer James Walker Group, said people with an already limited comprehension of pensions are not able to understand the risks and options made available to them by the Budget. This included the ability to take the pension pot, in addition to the tax-free lump sum, as cash taxed at their marginal income tax rate.
“I’m genuinely worried,” she said, at a DC panel held by consultancy Barnett Waddingham last week. “Between employers and the pensions industry, we have to do more to help them.”
Collins added that the manufacturer held nationwide roadshows in the run-up to auto-enrolment, to educate staff and to gauge their overall understanding of pensions.
“They’ve got real concerns,” she said, adding employees did not understand how either pensions or annuities worked. “They didn’t understand the level of risk they were taking.”
Damian Stancombe, head of employee benefits at Barnett Waddingham, who was also speaking at the event, said the traditional idea of a pension as something that provides an immediate income in retirement had been “confined to the cemetery” by the reforms and that the market was moving towards workplace savings.
He added: “DC has a very short period of time to be in the limelight.”
Prioritising engagement
Richard Butcher, managing director at independent trustee company PTL, told attendees the changes to DC were taking place amid a backdrop of trustee governance standards being ramped up, and complicated the objective to “provide robust and proactive defaults”.
Butcher added that the government guarantee to provide guidance to savers was “almost by-the-by”, adding that engagement was a more immediate concern in order to achieve good outcomes in retirement.
“We need also to provide an environment where people can make informed decisions,” he added. “This sets the bar very high and we are nowhere near it.”
