We speak to Pensions Minister Steve Webb about how the pensions landscape has been changing, with the implementation of auto-enrolment, and recent changes to the state pension and to annuities. We discuss the differences that these changes will make to employees at different stages in their working lives, from younger employees who are now auto-enrolled into a pension scheme for the first time, to workers reaching their retirement who will have greater freedom over how they spend their pension pot. We also speak to Steve about what these changes mean for employers, and what kind of financial and pensions guidance employers will be expected to offer to staff.
For an employer perspective, we also speak to Ben Marks, HR Compensation and Benefits Director at L’Oreal, and he explains the approach that his organisation has taken to pensions, and why they’ve gone above and beyond their pensions obligations.
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You're reading the transcript to the CIPD podcast series.
Philippa Lamb: Back in October 2011 I met with Pensions Minister, Steve Webb, to discuss the pensions landscape at a time when changes to the State Pension were imminent and the first phase of auto-enrolment was about to start. Almost three years later with auto-enrolment in full swing and a recent announcement giving much more control over their pension pots to new retirees, I met with the Minister again. This time I wanted to discuss the impact of the changes he's already made on employers and employees and hear what else he might have up his sleeve.
We started with the changes on annuities announced in the Budget. Now at the time some commentators labelled the new rules, allowing pensioners to spend part or indeed all of their pension pots not on an annuity but on whatever they please, as irresponsible. So how will they work and what will they mean?
Steve Webb: So the basic idea is it’s your money and you can decide what you want to do with it. So if you have a pot of money that's been built up and invested as you say a defined contribution pot, then instead of, and technically you didn’t have to absolutely buy an annuity but you had few practical choices in many cases, from April 2015 you'll be able to take all of it as cash if you want to or buy an annuity with some of it and mix and match or buy an annuity later in life, you have a range of options. There's a tax implication for what you do and we obviously need to think about that but in principle it’s your choice, it’s your money.
PL: So am I right in thinking you can take 25% of it tax-free?
SW: You can and then if, for example, you took the whole of the rest of it as well it would be taxed as if you’d earned that money in that year. So to give you an example if you've got a pension pot of £30,000 if you take it all in one go we’ll say, “Oh you've earned £30,000,” and we’ll tax most of it at the standard income tax rate. If you took £3,000 a year for ten years you might not pay tax at all because you’d be potentially under the tax threshold. So that's one of the things people will have to think through.
PL: So there's an underlying encouragement for people not to be too profligate.
SW: There's certainly good tax reasons to spread the money and also we think, almost in terms of personalities, you know, the sort of person who puts money aside, is serious about pension savings, saves more than the legal minimum, doesn’t suddenly on the whole become a spendthrift at 55, 65 or whatever.
PL: I asked Steve Webb if he felt that this increased flexibility around pensions would make people think differently about when they would retire.
SW: I think it will have a lot of knock-on effects and truth be told we probably don’t know what all of them are. I think first of all it will probably make pension saving more attractive and we know that automatic enrolment that I'm sure we’ll talk about later has been very successful but older workers have been slightly less willing to go in perhaps because they thought they were tying their money up, now they’re not so I hope it will lead to more pension saving. But it will, yes it gives people new options is the way I think of it. So for example you might ease down your hours, not necessarily stop working but ease down your hours, take some of your pension as cash or as a guaranteed income. It will just give people, perhaps particularly in couples, more options to juggle what they do as a household.
PL: The government has been very clear that guidance must be on offer to help people making these very big decisions around pensions and retirement but where will this guidance come from and who will foot the bill?
SW: We use the word ‘guidance’ generally, although the Chancellor used the word ‘advice’ just in a sort of colloquial way but we mean specifically guidance which in this context is not independent financial advice regulated about products, very tailored to the individual, it’s something broader than that.
PL: So not in the context of financial services advice?
SW: Exactly that's right. But what it does do is get a lot of people to the starting line. At the moment people are making retirement choices, buying annuities or not and all the rest of it with practically no help, guidance or advice at all. So I see this as a big step forward. It will familiarise people with the basics, the sorts of choices they have, and as someone put it to me the other day people will start to know what the questions are they should be asking. And even if we can get people to that sort of stage that will be a big step forward.
PL: Absolutely I understand that but where is this advice going to come from?
SW: Obviously we’re in the middle of a consultation at the moment and this is all up for grabs. I don’t envisage that pension scheme providers will be delivering the advice in general. So if you've got a pension with an insurance company my sense is – we haven’t made a final decision - but my sense is that's quite close, I want the person in the room not to be trying to flog you something, to be sufficiently independent that you can be confident that you’re having an unbiased conversation. It may well be that pension schemes pay for guidance but we’re not expecting 40,000 pension schemes to actually organise it all individually.
PL: So pay in the form of a levy.
SW: For instance.
PL: It has been suggested.
SW: That would be an option yeah and one of the reasons why you might do it that way is lots of people have got multiple pensions so you’re in three pension schemes do you really want three providers to have to set up three lots of advice? It would be a nonsense. What you want is one conversation where you can bring all of your pension issues into the room. You won't get, as I say, tailored financial advice but you'll start to see how it all fits together. You'll realise that you might need to prepare for decades. You'll realise there are tax consequences of what you’re doing and so on. And you'll also know where to go for more. So what everyone says to me this isn’t a one-off event, you need help before this, you need help after it so there’ll need to be websites and webcasts and phone lines and all of that kind of stuff and infrastructure and that may be where part of the £20m the government has set aside ends up being spent.
PL: I asked the Minister what the changes mean for people with defined contribution pension schemes. So this came up I think last year was the first time I started reading about it and the idea being in simple terms to give people involved in defined contribution schemes a bit more certainty about how much money they would actually have, just as people in final salary schemes have.
SW: Absolutely so we know that over the years final salary, index-linked, gold-plated schemes have been on the way out but the employers who provided them are still there and many of them still want to do more than the bare legal minimum; ‘your little DC pot in your little corner and me in mine’ kind of thing. And so what we hope to have been able to enable employers to do is to sponsor different sorts of risk sharing schemes, not take back all the risks that they’ve just got rid of. I don't think we’ll turn that clock back, but either to have big pooled schemes like they have in the Netherlands for example, collective DC schemes where on average the volatility of the outcomes is much lower than if you've just got your little pot. So things can be smoothed and that is appreciated. Or we have a thing we call A Pension Income Builder whereby bits of your pension are becoming more certain every year, so a bit’s still going to go up or down with the market but a bit’s locked in so that as you get nearer pension age you know more what you’re going to get. Now post-Budget that's more complicated, less clear-cut because clearly you can take the whole lot as cash.
SW: But even if all that's guaranteed to you is the cash pot that you’re going to get that would be better than not knowing what the pot was going to be. So we have to think through exactly what the Budget does for those models. But people still want certainty, they want reduced volatility and that's what these models will give.
PL: So that is a model you definitely want to take forward still?
PL: Any thoughts about when there might be more specific thoughts about how it would actually exist in reality?
SW: Yes I mean one date where it would be good to have everything sorted by is 2016 because some big company schemes will have to end contracting out at that point and at that point therefore there'll be, and indeed in the run up obviously to that point, they’ll be rethinking what they do. So having these new models in place by 2016 would be good. We have something else happening in May 2015 so it might be good to have it done by then as well.
PL: Steve Webb is also ushering in major reforms to the State Pension. In April 2016 we’ll have a new single tier flat rate and by 2028 we’ll see the State Pension Age rise from 66 to 67. I asked him how he thought the changes might affect people’s behaviour.
SW: Part of the State Pension reforms is to give people much greater certainty and predictability. Until these reforms come in you get a basic pension, you get a SERPS pension of anything between 0 and 100 quid, sometimes the company scheme is replacing part of that, nobody knew what State Pension they were going to get. The goal of the new scheme, it doesn’t happen on day one, but essentially we get to a situation where if you do 35 years as contributions or credits, basically if you spend your life in this country you’re going to get seven and a half thousand quid, basically if you get out of bed. There's enough ways of getting credits and contributions in that virtually anybody who spends their life in this country will get seven and a half thousand quid. Now that's the bare minimum we think people need to live on. That's the means test level at the moment.
And what we’re saying to people then is automatic enrolment in the workplace you save on top of that, and because we’re clear of the means test when you save a bit you’re a bit better off than your neighbour who didn’t save and we haven’t been able to say that before. So we think that this will underpin automatic enrolment, it has avoided the negative newspaper stories that say, “Don’t bother saving for a small pension it’s not worth it,” it is worth it and the Budget reinforces that message.
So for us the State Pension reform benefits particular groups, so lower paid workers on average because it’s not earnings-related, many women whose caring in the past hasn’t been properly valued and the self-employed interestingly. Obviously there are losers; the higher earners on average will get less than they would have done because the whole thing costs about the same. But the idea is simplification, rewarding saving, enabling people to plan.
PL: Back in October 2011 the auto-enrolment process was just beginning and when I met Steve Webb then he talked at length about how an enormous publicity drive would help to raise people’s awareness of the personal responsibility we each now have to plan our retirement finances. So nearly three years later does he feel that campaign has done its job?
SW: I think it’s gone stunningly well actually. We’ve auto-enrolled in 18 months 3.3 million people, nine out of ten have stayed in, which is far better than anybody really thought would happen. And when I go to conferences and I say, “Stick a hand in the air if you've seen the ‘I’m In’ adverts, the Theo Paphitis, the Karen Brady, the posters and so on,” overwhelmingly people have seen them and then when we do survey work and we look at the people who have and who haven’t seen them the people who have seen the adverts are much more likely to stay in, much more likely to engage with pension saving, so I think (rare thing!) highly successful government policy and highly successful government advertising campaign.
PL: But what do pensions experts outside the Westminster bubble think. Ben Marks is HR Compensation and Benefits Director at L’Oreal. I asked him if he'd seen a change in the way employees there think about pensions since auto-enrolment came along?
Ben Marks: Yes definitely. We had a huge communication exercise to make sure people understood what we were trying to do. So just by virtue of explaining to them what they needed to do, if they wished to opt out and really just the very basics of what a pension is meant that the awareness was absolutely heightened and that's brilliant. But I don't think it’s got to the heart of really capturing people’s imagination because the very nature of it, it’s complex, it’s a long way away, and you have to give people a certain amount of information which they don’t particularly want to read. So I think people understand because it’s a fairly simple message, you know, you put in 1%, the employer puts in 1% and you save some tax and that's for your retirement which is a nice simple message. But really underneath everything, how are the investments working, what are they going to have when they retire, etc. etc. I think the level of engagement is nowhere near what it needs to be to really fulfil I think what all employers want to do which is to have people really understanding the value of that pension and really making additional investments into those schemes.
PL: Even though L’Oreal’s drive to raise awareness about the importance of retirement has worked well, Ben Marks acknowledges there is still plenty of apathy about pensions from some members of staff, particularly those who perhaps feel retirement is a long way off.
BM: The measurement of how well you've done on your campaign is really how many people have opted out.
PL: Indeed and how has that been at L’Oreal?
BM: We did very well; our opt-out rate overall was less than 5%.
PL: So that's encouraging.
BM: It is and when we think two years ago when we were planning it we were anticipating 20% and then 10%. Now I'm sure we did a good job in the communication but at the same time is it really a case of people were even apathetic enough to opt out or not which is…
PL: They just couldn’t be bothered to opt out.
BM: …it may be a worry on that side but I think you can always gauge by the level of queries that you get through and for an HR department if we’re getting a huge number of questions, “What’s this on my payslip - I didn’t know anything about it?,” then we’d worry about it. But the fact is we didn’t really get any of that, it was quite a painless exercise.
PL: But does that play into the apathy theory?
BM: Well yes. I think the balance for us is taking a view of are people making an active choice to come in or out of a pension scheme. And before auto-enrolment came along we had always taken the view that individuals knew what they were getting, we’d given them the information, if they didn’t sign up to it it’s because they had made an investment choice and they were going to invest in something else. And realistically what really was happening is people weren't equipped with the knowledge, they didn’t really have the education, the confidence to make a decision, and it was complicated and not that interesting for them. And I think what happened was they just didn’t engage with it and they didn’t sign up and what we’ve actually done is taken the view that let’s just accept that, we’ll do as much as we possibly can and we continue to do lots of engagement work but the role of the employer really has to be as the government has set out is you've got to be more paternalistic, you've got to be more benevolent. You've got to take a view of what is the best policy for the individual, irrespective of whether they really want to engage with you. And what we’ve actually done as a result of auto-enrolment is taken a really good look at our pension strategy and think well actually we’re going to put our contribution levels at a higher rate, so as they advance over the four or five years…
PL: Employer’s contributions?
BM: Yeah for both. So rather than just saying to people, “Right you’re in the scheme. We’ve done our job,” and rub our hands a bit, we really wanted to get to the point where people are saving at the full rates that we can offer.
PL: As Ben explained, L’Oreal is going beyond its auto-enrolment obligations and pushing hard on pensions even if some younger employees are more focused on other types of reward.
BM: Part of the impact of auto-enrolment for us, and I'm sure a lot of other organisations, it’s made us open our eyes and look at things afresh rather than just thinking, “right this is an obligation, it’ll cost us money let’s minimise it and move on”, it was an opportunity to really look at what is it we’re trying to achieve as an employer? What is our whole reward strategy? And that's when we opened it out to all of the other different elements of reward because of course you can't just say, “Right we’ve done pensions let’s move on to something else”.
PL: Indeed. I suppose looking specifically at pensions though I'm interested that you are going further than you have to in the sense that you’re taking, as you described it, a slightly paternalistic approach to it. Is the thought in your mind then that you’re doing that because it will play into the contract between you and the employers; the sense that this isn’t just about money, this is about us being a good employer who has a long-term regard for what happens to you, really whether you’re with us or not?
BM: Yes I think so. It does come back to the real philosophy behind the whole group of L’Oreal. We in the UK we have about 4,000 employees and we’re I think the fifth largest entity within the group, but worldwide we have something like 75,000 people and we have a sustainability agenda which encompasses employees in the sense that every employee the group believes should have a minimum level of protection and care from financial events. So this isn’t just the UK thinking “let’s do what we can and reflect the market”, this is really a much bigger deal for L’Oreal as an employer. And it’s genuine as well. I mean I think the history of the philanthropy that we’ve done and the impact in local communities is strong and the impact I suppose on the new sustainability agenda won't have a dramatic effect on the UK in the sense of everyone has to have, say, life assurance or maternity pay because a lot of it is within the legislation and a lot of it is something you do as good practice, but what it means is in different countries where the government doesn’t impose any particular statutory minimums the employer has to step in, whether they like it or not, and that will cause some discomfort from a budgetary point of view but it’s the right thing to do and the group recognise this. So all of our approach is just consistent I think from a global basis.
PL: Food for thought there about the impact of these shifts in British pension practice for organisations with a global workforce. And here’s how Pensions Minister Steve Webb sees auto-enrolment evolving in future.
SW: Clearly we’ve got to keep our eye on the ball. We’ve auto-enrolled roughly a third of all the people who have to be enrolled. We are working our way down the size scale so from next May/June we start the under 50s employees. So that's a completely different ballgame, you know, the firms who employ one person and so on have never been anywhere near any of this.
PL: More problematic?
SW: Yes more problematic. But more potential as well I think because clearly they haven’t got the HR departments, the pensions departments and all the rest of it, they haven’t got the Comms budgets, but they’re generally dealing with people who’ve never had the chance to have a pension before. And if you've got one employee who is on a regular job and wage and so on, is all within the criteria, it’s much simpler actually than if you’re a big firm that's got multiple payrolls and casual workers and people who could be foreign workers or not, actually for many, many smaller firms this is relatively simple. We’ve set up NEST, the National Employment Savings Trust, as the provider who has to take your business. So there will be someone there for you. I would say to any small firm in the land, “Do not pay for advice unless you really, really want to.” You can do this thing without paying out your hard-earned cash - there's a provider there. There are others obviously and you should have a look around, but there is a provider that has to take your business, that's not for profit and that's been designed with you in mind. So the language has been simplified, the processes have been simplified and there’s standard letters on the regulator’s website, there are things out there to help people through this and actually employees appreciate it. So it’s a positive thing for an employer.
PL: With responsibility for thinking about pension planning shared between government, employees and employers these changes to pensions present a raft of challenges for bosses. One major change with a plethora of practical implications is the elongation of our working lives into our late 60s and perhaps beyond. For employers enabling that shift involves a multitude of issues, from health and insurance to adjusting job roles and phasing retirement. Ben Marks gave me some insights into L’Oreal’s thinking on the challenges ahead.
BM: Some of the things that we are looking at are just that, it’s making allowances for people who want to have a phased retirement, and we do this already as part of our scheme rules, we allow people to wind down their hours but still benefit from accrual into the pension scheme. But there are a lot of other areas that we need to address, we’ve got a fairly disparate population; we have our head office people; we’ve got distribution centre people and we’ve got a large beauty adviser population, these are the people behind the stores at Selfridges and John Lewis, through brands like Lancôme and YSL. And they’re a completely different profile as well, it’s a very transient business, but then people who stay for longer I mean they’re not sitting at a desk where you can manage their posture, they’re doing a very different role, just as the people in the DCs are. So I think the role of the occupational health professional is going to be stronger and it’s also about workplace design.
PL: And career management and progression isn’t it? These are management issues aren’t they?
BM: Yes they are and you’re right because you get to the point where, and particularly I think you see this in the professional services sector where you work for a certain number of years, you get promoted, you become an associate or a partner and then after a number of years you tail off and that's that. And those points are fairly well-defined, the number of years you would expect to last in each of those. So I think there has got to be some pretty radical thinking because we’re really not seeing that many people over 60 remaining with us at the moment, and that's their choice and that's the current environment. So if we’re putting another nearly ten years on that there's going to be some pretty big differences.
PL: Since he's been in post Steve Webb has led a raft of big changes on pensions and he's very open about the fact that he doesn’t think the job’s finished yet. So what else does he have in mind?
SW: It is funny because wherever you go and you talk to employers and people involved in the industry and they’ll say, “Leave us alone, just stop reforming,” and then you talk to anyone in the media and so on and they say, “And what’s next? What’s the next reform?” and I think we’ve done a lot of the fundamentals: I think State Pension reform was essential, mass membership of workplace pensions to auto-enrolment was important. I think regulating the quality of those schemes, charge caps, governance and all the rest of it. I think defined ambition and risk sharing is an important legal framework to put in place, so there's still more to do there. Clearly I don't think - speaking purely personally here, not for the government - but I don't think the current tax relief regime will hold, it’s so skewed towards high earners I think that something’s going to have to give there. But if you did simplify it, if you did, for example, give everyone the same rate of tax relief, you wouldn’t need lifetime limits and if you got rid of lifetime limits that would simplify things and it might get the top employers, the bosses, back in the pension scheme because people tell me the bosses are all off because they’ve all used their limits and they’re therefore less interested in the pension scheme. If they could start getting annual tax relief again that might make employers more interested in the work’s pension scheme.
PL: Politically difficult?
SW: Yes although if, for example, you had a standard rate of relief that was lower than the higher rate but higher than the standard rate, most people would gain because most people pay tax at the standard rate, not necessarily politically difficult?
PL: Do you see a realistic chance of that happening?
SW: It’s a purely personal view but it’s one that I will be promoting.
PL: That's it for this month. If your organisation is about to dive into auto-enrolment you'll find three earlier podcasts full of expert advice and shared experience from people who've already been through it in the CIPD’s site.
Next time we’ll be focusing on SMEs and as usual the podcast will be up on the site on the 1st Tuesday of the month. Don’t miss it.