Date: 04/10/11 Duration: 00:25:33
In this podcast Philippa Lamb discusses pensions with Pensions Minister, Steve Webb , Charles Cotton, CIPD Public Policy Advisor, Reward, Steve Rumbles, Head of UK DC Pensions at BlackRock and Tim Taylor, Head of Reward and Recognition at TUI Travel UK and Ireland.
Philippa Lamb: Pension planning is one of those subjects many of us would rather not think about. We know we should but somehow we just never seem to get round to it. Well next year we're going to have to because the government has decided to bite the bullet and bring in auto enrolment.
Starting in October a rolling programme will begin and employers will have a new statutory duty to enrol all employees earning above a certain threshold into a pension scheme. All this, along with the abolition of the default retirement age, an aging population and the possibility of a flat rate state pension in the future and suddenly everyone’s talking about pensions. Here’s what Steve Webb, the Pensions Minister, has to say about it.
Steve Webb: The challenge is that we have millions of people of working age today who are heading for a low standard of living in retirement unless we take action. The state will provide a basic minimum but for most people the basic state pension, even at a higher level, is just for the basics and most people want more than that in retirement but they’re not heading for that unless we can get far more of them into pension saving and saving more.
Steve Rumbles : I think if we didn’t take some action then we would be in serious trouble.
PL: Steve Rumbles is a pensions expert. He's managing director and head of BlackRock’s UK defined contributions pension team. He's also worked at Merrill Lynch Investment Managers and Lloyds Bank and according to him the government has a huge challenge on its hands.
SR: People don’t even understand how the current state pension system works. The basic principle I think was that a lot of people actually they think that they are putting money away and the government very kindly is hiding it away in some chest somewhere and in 30 years time they’re going to dust it off and they’re going to pay it to the member and that's what’s used and the reality is that isn’t how it works, we're effectively paying the retirees now and we all know, certainly in the industry, what the problem is but I don't think the basic member even understands that. Anything that makes it clearer and easier to understand has got to be a positive thing.
PL: Out on the streets in London’s Victoria, a quick straw poll told us what we already suspected, many workers are still in deep denial about their retirement finances.
PL: Do you have a pension?
A: No I don’t.
PL: Why not?
A: Because I don’t have enough money to start one up and I'm too old now probably to start one up and get anything from it so I'm just hoping I inherit ((laughs)).
A2: We get a pension statement every year but I'd be honest I don’t really take much notice in so much as they take what they take and that's as much as it is to contribute to a pension to give me some sort of income when I'm older.
PL: Do you know how much that will be?
PL: Do you have a pension?
A3: No I don’t.
PL: Why not?
A3: I just haven’t even thought about it really.
A4: I took my pension at work but I haven't got
my own private pension no.
PL: And do you think will it be enough for you to live on?
PL: Can you see yourself ever getting a personal pension?
A5: To be honest it’s just not on my agenda at all I never really think about it.
PL: Do you know how much you pay into it each month?
A6: It’s non-contributory.
PL: Do you know how much your employer pays into it each month?
PL: Do you think you should know?
A6: I get statements sent to me each year but I don’t read them.
PL: Is it a workplace scheme?
A7: Yes I'm not sure what that percentage is.
PL: So do you have any idea how much it will give you when you stop working?
PL: Auto enrolment will mean that every organisation from the biggest corporations down to the smallest of SMEs will have to enrol all eligible employees so unless the employee actively opts out they will, from that moment onwards, be saving for a pension. Pensions Minister, Steve Webb, told me what he's hoping to achieve.
SW: The idea is to build on the lessons from America and elsewhere which show us that when people are put into a pension that they opt out from rather than having to actively choose and opt into one, coverage rates tend to be much, much higher and we can look at American workplace schemes which run on one basis or another basis and often the staying in rate can be 80 or 90% on an opt out scheme and as low as 20 to 30% on an opt in scheme. So we know pensions are difficult for people, they’re off-putting, they don’t know what to choose so we're taking all of that away from the individual, it will be a new duty on employers starting next summer to enrol their workers and starting with the biggest firms.
PL: Now I see you’re hoping to add I think it’s as many as seven million new savers, obviously lethargy will mean that some people will just stay enrolled because they won't think about it, they won't opt out but I have seen estimates of as many as 40% of people expected to opt out. How are you going to combat that?
SW: There's a lot we can do to make sure that people stay in once they’ve been enrolled. One of the important things is that we need to communicate with employers because, you know, some people say they don’t trust politicians and they don’t trust financial advisers but they may trust their employer rather more on this sort of issue. So when the Pensions Regulator tells employers about their duties we’ll make sure that they are comfortable in communicating with their workers, they know what they can say, they’ve got standard literature they can issue, so we don’t want to expect employers to be pension experts but we do want to give them the tools so that when people come back to them and they want basic information they know where they can find it and we want to stress the value of the employer contribution. If you put money in an ISA, or indeed under the mattress, you don’t get an employer contribution and it’s like a pay rise if you don’t want that pay rise fine opt out but it’s a valuable additional benefit for people which we hope they’ll take up.
PL: Do you think you've got that message across then because I think, you know, this is 55% of SMEs saying their schemes will not comply? Can that be right or are they just misunderstanding your regulations?
SW: One of the things about auto enrolment is it is a staged process. So next year, 2012, it’ll be the huge employers, Britain’s high street names and so on, many small and medium size firms won't even come in until 2014 or even 2015 so there's several years to get this thing going, to get the information out. Obviously with legislation still not even through parliament yet we can't start writing letters to people telling them because parliament might change it so we need to finalise it but then we have a major communication strategy as a department. The Pensions Regulator will be communicating with employers directly. NEST will be communicating with people and other providers as well. So this will gather momentum very significantly in the coming months.
PL: If significant numbers do opt out it will be problematic for the government. The CIPD’s Reward adviser, Charles Cotton thinks it’s very hard to predict opt out numbers but that the best way to get people to stay in a scheme is to make it more affordable and the surest way to do that boost the economy at large.
Charles Cotton: We’ve got to see economic growth a priority from the government to try and boost the economy and obviously it’s very difficult but if we can get the economy to start to grow we start seeing people getting pay rises, we start to see consumer inflation falling, then people feel more confident about the future and will start, you know, more likely to not opt out of a pension scheme and possibly pay even more money into a pension scheme.
PL: In a bid to create a genuinely low cost, flexible and easy to understand pension scheme for lower earners the government has set up the National Employment Savings Trust, or NEST. By 2017 the total contribution level will be a minimum of 8%, that's 3% from the employer, 4% from the employee and 1% tax relief. Tim Taylor is head of Reward and Recognition at TUI Travel UK and Ireland. It’s the largest sector in TUI Travel Plc, one of Europe’s leading leisure travel companies. They do offer defined benefit schemes but their main vehicle is a defined contribution scheme which is open to all UK employees to come in on various levels. About a quarter of their employees are currently in a scheme.
Tim Taylor: For about 5,000 across the UK in total in a scheme so if you’re looking at auto enrolment we're thinking well you’re probably looking in the region of around 13 to 14,000 potentially will need to come in so some quite sizeable numbers.
PL: On top of that?
PL: But of course they can only guess at how many will opt out.
TT: We’re working on the assumption that probably around 80% will come in. I think we're…
PL: And stay in?
TT: Yes I think so. I think, you know, pensions is complicated and I think, you know, people don’t go in because they don’t really understand it but I think the reality is there's also a bit of inertia so once people are in they’ll probably stay in. So I think our feeling is that actually the numbers will be quite significant that will come through once we've auto enrolled them in and they will probably stay in the scheme because they’ll know it’s a good thing to be in a pension scheme. There may be some affordability issues on an individual basis but I think most people will recognise that once they are in they’ll probably stay in.
PL: The success of the reforms really balances on the issue of employee opt out and that may vary widely across different sectors. Here’s Steve Rumbles again.
SR: Different industries will approach this in different ways and I think the government has this view, NEST have this view of a 20 to 25% opt out rate. I think that at the smaller end of the corporate scale I think that's probably right, I think for larger companies apathy will prevail and therefore not as many people will opt out as predicted, would be my view.
PL: For smaller firms without schemes or whose existing schemes will not be acceptable under the new regime it will take significant amounts of time and money to organise alternatives. Steve Webb.
SW: For smaller firms who don’t have any pension provision at all clearly NEST will play a crucial role and one of the good things that NEST has been designed to fill a gap in the market so they've had to think about firms who aren’t very interested in pensions, people who don’t understand the jargon of pensions, we've made sure that NEST is a low cost provider. So we've made sure that there is someone out there who’s available, fulfils your statutory duties, in a relatively painless way and that's crucial. In terms of firms who already have schemes we've tried to make it as easy as possible for them to tick the box in terms of adequacy. So rather than say, “Your scheme has got to look exactly, to every dot and comma, like we say,” we've got a pensions bill going through at the moment that relaxes some of those rules, that says basically if it is a decent scheme, and we set out various ways it can satisfy those rules, then you don’t have to change it just carry on. Now if you’re only putting a few percent in it’s not going to pass the test, you know, we do need to make sure a decent amount is going in but we've tried to be as flexible as we can.
PL: As Steve Webb says, NEST is designed to make things cheaper and easier and perhaps it will be SMEs who opt for NEST as a pension provider but what else ought the government to do to support employers in getting the message across? No one’s under any illusions that explaining pension reform to people is anything other than an uphill battle.
PL: Okay did you know that next year everyone’s going to be automatically enrolled into a pension scheme at work?
A: No I didn’t know.
PL: Yeah it’s called auto enrolment. You can opt out but you'll be automatically signed up for it.
A1: I would probably opt out.
PL: Do you have a pension?
A2: I have a pension I'm a civil servant, although there's all the action that's being taken because they want to change all the criteria of it. So again I'm not quite sure how much, when and so on and so forth.
A3: I think if this had happened years ago I probably wouldn’t do but now I think it’s probably too little too late.
PL: Obviously the communication strategy is crucial. Here’s Steve Webb.
SW: Because we're talking about ten or 11 million people being auto enrolled this will be massive. This will be, you know, if they’re not talking about it on East Enders I'll be surprised because one in four of the adult population’s going to be auto enrolled. This isn’t going to be a niche, techie, pensions thing, this is going to affect somebody in your household, somebody who lives next door.
PL: So will we see big TV campaigns as we saw the drink driving and anti smoking?
SW: There will be a whole raft of campaigns. I mean we're working out the exact strategy but there'll be national campaigns. As I say employers will be contacted directly specifically, provided template literature and all of that and although there is a duty on firms to comply we want to help then, we want to enable them to. There is a stick in the system, there is a penalty for not complying but we don’t want to have to use it. We want to enable firms to comply and I think people will be talking about this thing. We're starting with the biggest firms who are the best able to communicate and we will learn lessons as we go when we get to the smaller firms.
PL: So the government’s aim clearly is to create a communication campaign big enough to really get people talking about this but Tim Taylor is in no doubt that the nuts and bolts of the communication’s responsibility will still lie with the organisation.
TT: I'm working under the assumption that although obviously we're expecting some communications to come out centrally from the government…
TT: …I would imagine that the way these things go is that we will probably pick up quite a lot within the company and…
PL: But how do you feel about that? Is that irritating? It’s not really your job is it to educate your staff about pensions?
TT: It is a little bit frustrating but it is the way that HR legislation and practice really go so more and more comes back to the employer. Ultimately they do work for us. It is a key opportunity for us to show how we differentiate, that we actually take this issue seriously and can retain and attract people. So it is something that we need to take on board but yes it is a bit frustrating. What I'd like to see is a comprehensive awareness programme that actually says, “You need to be aware of this. You need to be aware of your financial future and it’s important for you as an individual, and this is considering across the UK, but actually as a business we can then tag onto the back of that and say, “And yes this is what we're doing,” but I suspect we’ll probably be doing a lot of the legwork as well.
PL: We can all see there’s a clear necessity for the government to simplify and encourage pension saving but is it fair to put the onus so heavily on the employer? I put that to Steve Rumbles.
SR: It is an expensive job but it’s one they recognise exists, it’s not a UK phenomenon it’s a global phenomenon, okay. So they’ve got to deal with it. My sense is that you can approach this in one of two ways, you can either say, “We've got to put our hands in our pocket and come up with a load, a load of money, this is all terrible,” da, da, da, or you can embrace it and you can say, “You know what, we've got to do this, they’re probably going to fund it from salaries in some way, shape or form, anyway, logically,” so you might as well make the most of it and promote it as a positive thing to do for your employees.
PL: So the real challenge for businesses is to turn this into a quantifiable benefit not just an expense?
SR: Well why not? It’s an expense you've got anyway, why not promote it?
PL: That’s exactly the approach that TUI is taking. Tim Taylor.
TT: I think the way we are looking at it is we know that we're going to have increased costs as a result of auto enrolment, now there's two approaches to that, we can just comply with the legislation and take the cost from there or we can look at it and say, “Okay well for that spend what can we do that will actually give us a better result for our employees at a better benefit offering and provision that will retain and attract individuals coming through?” So you've got to do the work, actually why don’t you widen that and see what the opportunities are whilst you're doing that work to improve what you already have?
PL: This is where the role of HR really comes into play. Charles Cotton.
CC: I think it depends on HR making the business case for the organisation and in some instances employees you need them to get the job done but they don’t necessarily add value or create value for the organisation. So in those instances employers will probably just say well we’ll do what the legal minimum and what the law requires. For other organisations especially those in the service-based sector or knowledge-intensive firms or innovation and creative industries then employees are the people who create the wealth, they are a source of competitive advantage for the organisation so therefore they do want to attract the best, retain the best and develop them and in those instances pensions will be an important part of the overall package.
PL: The proposal for a new flat rate state pension is getting a broadly positive reaction. Steve Webb explained the benefits to me.
SW: What we're doing is trying to simplify a very complicated system. We're not spending more money. So we're taking what’s currently a wide range of pension outcomes, you know, somebody retiring in a few years time, a typical man, actually gets about £160 from the state, a typical woman about £130. We're replacing that kind of system, related to earnings and all sorts of other things, with a simple system. So if we go ahead the idea would be over time people would get a flat rate pension, broadly the sort of figures we talked about are around £7,000 a year compared with a basic of about £5,000, but people are getting other money on top. So it’s not about throwing money at the state pension it’s about simplifying it precisely to support auto enrolment so that when somebody thinks, ‘Well shall I bother saving?’ they don’t open their national newspaper and see a story that says, “Don’t bother saving because the government will just means test it away from you,” they know that what they save is theirs to keep.
PL: Current plans to raise the state pension age to 66 by 2020 are going through parliament now and the age could shift to 67 as soon as 2026. Now that would mean there are eight million people in their 40s now who are going to retire a year later than they planned so why does the government keep moving the goalposts? Pensions Minister, Steve Webb.
SW: The current plan to go to 67 by 2036 is just too slow but I think it’s possible to exaggerate this. People will typically, even at a pension age of 67 when we get there, have over two decades in retirement, so this isn’t work til you drop. The people we're talking about, say we move forward, as you suggest, to the mid 20s these people already have a pension age of 66, so it’s a one year change, if we announced it soon that would be at 15 years notice from today, now I'm 46 so I'd be covered by this, frankly another year it doesn’t seem unreasonable, given everything that's going on, to adjust my pension age by a year with that sort of length of notice. Now we all know we're living longer but we're living longer like an express train and therefore we can't say 40 years out, 30 years out, 20 years out, this is definitely your pension age because things are just changing so dramatically.
PL: So you need to reserve that right to change the age again?
SW: Up to a reasonable point but we do accept the need for a minimum notice period.
PL: There's a fear that employers with schemes where the employer currently contributes more than 8% will take the opportunity to save money and level down when the reforms come in leaving employees out of pocket. I put that to Steve Webb.
SW: There are employers who have existing employees in existing schemes. People say, “Oh they’ll level down.” But what does that mean? That means they say to somebody who they’ve employed, maybe for years who they’re putting, I don't know, 8% into their pension, “Guess what we're going to slash your pension contribution,” that's not an easy conversation to have. It may well be for new employees or employees who aren’t in the scheme they’ll enrol at the minimum level. I can see a sort of two tier approach may happen and I think that's clear that will happen in some cases but there's not much evidence that existing provision for existing workers will be reduced. There was one survey recently, The Association of Consulting Actuaries, that emailed 50,000 firms and 49 and a half thousand didn’t reply and on the strength of the 400 odd who did they came up with a sort of headline that scared people. We have to be very careful about this. The Department’s done rigorous work on this, surveyed employers, talked to all sizes and shapes and we think that what’s called levelling down will be quite limited. Some firms will but the majority will add to provision and then of course that will be reflected in pay negotiations and other…you know it is a cost and it will have to be borne.
PL: So will these reforms put Britain in a better place 30 years down the line? Steve Rumbles.
SR:. Well obviously I hope it does, not least because if I do the sums I'm not far off that myself so ((laughs)) sort of needs to. I think we’ll be in a better place than we are now I don’t doubt that. My challenge I guess is that a typical contribution into a final salary scheme at the moment is 23%. A typical contribution into a DC scheme at the moment is around about 11 or 12 and general thinking from certainly the modelling tools we've got it needs to be nearer 15. So it isn’t hard to work out that eight is not enough.
PL: Which is the NEST contribution.
SR: Uh huh and so my problem I guess is that employees, because the government has mandated eight, well it’s not the NEST contribution it’s the Reg: contribution but the bottom line is that people will assume, again apathy, they will just assume that if the government said it was eight it is eight and that's what they need and therefore the pensions that they get when they start to retire or 20 years time when they sit down with an IFA who says, “Well you’re way off track where you want for your standard of living,” that's going to be a challenge. So the bit I don’t agree with is that eight is sufficient but you've got to start somewhere and I think it’s right to build up over time because that helps employers and employees in, as you say, a bit of a strapped time. But it’s interesting in Australia the rates have continually risen such as I think they’re around about 12 now.
PL: And presumably we’ll see that here won't we?
SR: I would have thought so. I would have thought so.
PL: HR has many challenges here. There's an opportunity to pitch these reforms as a tool for recruitment and retention but there's also a big logistical challenge. Each and every organisation needs a strategy for implementing the reforms and this is where HR really comes into play.
SR: Yeah I think the bigger problem for firms actually is not, clearly finding the money to pay for it sure, but this legislation didn’t just happen last week it’s been building up and you’re right companies are strapped but nevertheless it’s not new news, so to speak, the bigger challenge appears to be around payroll systems and personnel systems and their capability to create these files and to identify whether you're earning enough to be auto enrolled, whether you’re the right age to be auto enrolled, picking up the fact that you opted out and then three years later you need to be opted back in again on the staging date. I'm not aware of any payroll or personnel system that does that and the general feeling in the market at the moment is that they’re not planning on doing it either but that's a big challenge.
PL: So the basic logistics of making this work?
SR: Absolutely that to me is going to be a real challenge.
PL: Because we haven't heard much about that?
SR: No we haven't and I think that's probably because again larger companies, particularly the biggest ones for October next year, have got big pensions departments and big HR departments so…
PL: But for SMEs?
SR: Correct when you get down into the SME level you might just buy a version of Sage, for instance, if that's not in there how are they going to identify all these people? I think that's almost going to be the bigger challenge, oh you need to find 20 million. Well okay I need to find 20 million how do I solve the systems problem? Oh I've left it too late what do I do now? That's going to be a big challenge.
PL: More than ever it’s a successful communications strategy that will differentiate those organisations who manage to implement and make the best of these reforms. Charles Cotton.
CC: You are going to need more emphasis around employer education to say, “Well this is what the offering is. These are the choices, these are the consequences of the choices,” and then being able to communicate that effectively and having moved away from the days of paper communication and now organisations are looking at the internet and increasingly social media we think from Facebook to Twitter, to communicate the value of the employer offering.
PL: So a big challenge all round for employers.
CC: A big challenge but hopefully the CIPD is there to help our members meet this challenge and rise to this challenge.
PL: For more information on how to make the pensions reforms work for you, including the CIPD’s research Business Case for Pensions and the Employee Outlook Focus on Pensions, check out our show notes at http://www.cipd.co.uk/podcasts.
Remember we're always keen to hear your feedback so please do fill in the feedback forms on the podcast page. As we just heard from Charles social media is a vital part of communication nowadays and....
Next month, I'll be exploring the many imaginative and unusual ways in which smart organisations are using social media.