Explore the implications of the pensions auto-enrolment initiative for SMEs as they prepare for its adoption in 2014
Date: 01/10/13 Duration 00:16:12
In this podcast Neal Blackshire, Benefits and Compensation Manager, McDonald’s, Kendra Osenton, Pensions Policy Manager, BT, and Andy Seed, Director of Tax and Pensions, KPMG discuss pension auto-enrolment for SMES.
View the full podcast transcript
Philippa Lamb: Automatic enrolment is the biggest shake up of workplace pensions for a generation. It’s a long process that started last year and will stretch into 2018. The biggest employers have already taken on their new duties, now it’s the turn of the SMEs with between 50 and 1,999 workers, many of whom have been given staging dates in the next 12 months.
It’s a huge project; some 50,000 employers will be enrolling a staggering nine million people in the next year. In one month alone over 10,000 organisations will be simultaneously enrolling their workers into pension plans.
Now you may remember we looked at auto-enrolment around this time last year and in this episode we’ll take a look at some of the lessons the SMEs can learn from the big guys who’ve already been through the process. Neil Blackshire led that process for McDonalds. They stage back in January and I asked him how the scheme went down with their 52,000 employees.
Neil Blackshire: It’s a pension scheme so no one was screaming, jumping up and down and cart-wheeling down the streets; the best indication that we can use is our opt-out rates. We had no preconceptions as to what that number might be and in the event we are running 3.47% opt-out for our salaried employees but the really encouraging thing is that for our hourly paid employees, and we've enrolled 11,500 so far, we've got a 2.2% opt-out rate.
PL: That is surprisingly low.
NB: Pretty incredibly good actually.
PL: McDonalds has 12,000 restaurants in Britain, one third of which are company owned. They have 35,000 hourly paid employees and 17,500 salaried workers. As Neil explained even though they started to plan in very good time the run up to their staging date wasn't all plain sailing and the first clouds appeared on the horizon in 2012 when they went to visit NEST.
NB: They sort of started drawing timelines on the wall in terms of what regulatory communication had to go to whom, by when and in what format and so on and so forth.
PL: And it’s a lot isn’t it?
NB: There's a lot, we had clearly missed a few tricks on that I would have to say. We knew there was communication but we hadn't quite understood the different types and when, and particularly the timeframes involved. So we sat there for an hour or so with our chins on the desk and came away realising that we absolutely couldn’t; with 35,000 employees, we had no capacity internally to do that.
PL: After the visit to NEST McDonalds decided they needed a partner, a middleware provider to help them organise the communications so Neil invited a series of potential providers to come in and pitch for the business.
NB: But we had a real problem because in the summer of 2012 it was quite apparent that there was a real disparity with the level of readiness from those providers. So although providers were coming in and telling you about their whizzy dizzy new system some of them clearly just didn’t exist. The best example of that is I had a company who shall remain absolutely nameless coming in and presenting me with two laminated sheets of A3 paper which described the system that would be.
PL: I bet that filled you with confidence didn’t it?
NB: Well it was colour so they obviously hadn't scrimped on the printing but when I said, “Okay that was quite interesting, when can I see a demo?” “Oh well it’s not quite ready yet. It’s going to be ready in a few months.”
PL: McDonalds did eventually find a partner provider but the delay in doing so put the whole process under pressure. Kendra Osenton is pensions policy manager at BT and she outlined for us how the telecoms giant set about their enrolment process.
Kendra Osenton: At BT we started thinking about the undertaking in November of 2010, so about two years before our staging date and then we really kicked it off properly about a year before our staging date where we had another workshop. We again brought the same people together and really started to think about what we needed to do and our first step was to put together a high level business requirements document so that we could inform our partners what our requirements were likely to be.
PL: BT’s workforce is 70,000 strong and the majority of their employees were already signed up to one of their two pension schemes. Many of those who weren't had actively chosen not to enrol so Kendra’s challenge was getting those people not to opt out of auto-enrolment.
KO: What we didn’t want to do particularly with the economic climate being the way it was, was draw to people’s attention too much how much they were paying into their pension. They were paying a decent rate into the defined contributions scheme and were in a good DB scheme already and we might actually prompt people to opt out of the scheme and remind them that it was a voluntary thing to be in the scheme. So we sort of had different issues I think to a lot of other companies.
PL: So presumably you didn’t do some big all-singing, all-dancing campaign about it then?
KO: No we didn’t. No, we did a very low key communication, so to our existing scheme members we really did not do a lot more than a statutory communication very shortly before our staging date and for our defined contribution members the only thing we did was remind them that they could pay more.
PL: There are very tight regulations on who employers need to communicate with, at what stage and about what. At McDonalds after careful consideration the communications were straight talking, simple and factual. And their low opt out rate suggests that strategy did hit the mark.
NB: I'd love to say that resonated and that was the entire reason that we got such a low opt out rate but being realistic it’s going to be a mixture of three things. It’s going to be a mixture that the communication worked and people read enough of it to understand what was going on. Obviously our staging date being January was quite good timing in so far as the DWP’s first wave of publicity had hit September, October, November prior.
PL: Yes, kicked in a few months earlier.
NB: So people were sort of aware that something was happening. There is undoubtedly an element of apathy, how big an element I don't know but I think part of it is also the fact that with the whole pensions being in the press and auto-enrolment being in the press a lot of people, particularly people in the sort of younger 20s, said “oh it’s probably a good idea isn’t it? I suppose I should grow up and get started”.
PL: At BT, of the group of employees that were not yet in a pension scheme, the opt-out rate was higher than expected.
KO: A third of those pensioners decided not to stay in the NEST arrangement but it’s been reasonably sticky in that two thirds of them have stayed in.
PL: It’s quite high though isn’t it? So a third of them opt out.
KO: Probably higher than we thought it would be.
PL: Yeah why do you think that is? Because it was this nexus of people who'd already decided they didn’t want to do the pension thing?
KO: Yes I think because they'd finished.
PL: Saving resistant?
KO: Well I think they’d just finished saving for a pension and were in receipt of a pension so they just didn’t see themselves as being in that phase I suppose. Having drawn their pension a number of them would be preparing for retirement properly and I guess didn’t see it as a long enough term commitment for them that it was something to stay in.
PL: BT’s high opt-out numbers are a bit misleading though; despite them the vast majority, 98% of their employees, are now in a scheme. However big or small the organisation, they all have to meet the same regulations but for SMEs the auto-enrolment challenge is a very different one to the one the large organisations faced. Andy Seed is pensions adviser at KPMG; we talked to him for the last pensions podcast. He and his team have watched closely as auto-enrolment unfolded over the last year.
Andy Seed: It’s been a very, very interesting year from our perspective. There's been some very complex challenges and we've already seen with the DWP effectively writing simplification into auto-enrolment legislation that there's been an acknowledgement that the rules were far more difficult to implement than they should have been from the start.
PL: Right so it is being tweaked as it goes along?
AS: It is being tweaked as it goes along and for those smaller businesses that have yet to stage it’s going to be easier for them than it has been for employers that have already gone through the process.
PL: Early opt-out statistics are sitting at between 6% and 8%. Now that's far lower than the 25% to 33% the government models predicted and the 40% some commentators warned could happen but according to Andy Seed the figures now feeding through from large organisations are likely to be very different from the final opt out numbers.
AS: The early opt-out statistics in my opinion are completely meaningless because you've got to think that only the very, very largest companies in the UK who had the biggest pensions footprint already, with the most money to throw at the problem and the most resource to put behind making it work, have been through this process so far. So if you've got that kind of infrastructure behind you and also probably the deepest pockets to pay for professional advice to help them, to get you to that point of getting over the line it’s probably quite unsurprising therefore that member engagement has been quite high amongst those populations. I think we will see a completely different story when we're starting to enrol businesses who’ve never engaged with pensions before, possibly this is their first ever form of pension savings and actually there's some other reasons why they might not want to engage with pensions.
PL: So this is a key moment then. Are you saying you’re expecting to see a lot more people possibly opting out on this basis, largely because the communication of the benefits just won't be there?
AS: I think that's true but not just the communication actually; the will to kind of push it is a valuable benefit and my own view remains that it isn’t going to be until we've got about 18 months worth of data that we’ll actually see the true number. But I'd hugely swing back to that point that these large employers have had less people to enrol overall etc. and have had all those resource issues in the background. So I don't think we're looking at a true picture at the moment.
PL: With less than ideal timing for the government the Office of Fair Trading suggested last month that some pension schemes could be offering poor value to savers due to their steep charges. The finding was part of a wider report which, thanks to the media coverage, caught the attention of many otherwise unaware people and with nine million people due to be auto-enrolled over the next year the worry is that it could prompt more opt-outs but Andy Seed isn’t unduly worried.
AS: I don’t think, without wishing to be disparaging to the UK consumer, that actually the level of individual knowledge around how pension charging will overall impact the value of the pot that they get out possibly 20, 30, 40 years into the future is sufficient to make them think in relation to opting out of pensions auto-enrolment.
PL: And that's the problem though isn’t it because most people don’t understand how charging works?
PL: And so all they see is a headline saying “charges too high.”
AS: Well if you look at the main contributory factors to how big a pension pot people will get when they retire, there are three main factors. One is how much you pay in, which is probably the most important. Second is how well will your investments return. And thirdly what’s the impact on charges? And there has been an enormous amount of modelling and proving that actually charges overall has by far the least impact on how much you get at the back end.
PL: As we've heard though the big organisations have effectively been trialling the system and now the government is in the process of simplifying it for future ease. So I asked Kendra if there was any aspect that she thinks isn’t working well.
KO: I think our big issue with it was that we were already automatically enrolling everybody. We just weren't doing it the way the regulations specifically said we had to and there was no sort of exemption for that.
PL: So you had to go through this process even though you’re already doing it.
KO: We had to go through a big, expensive project to more or less achieve what we had to begin with.
KO: Well, money we would have rather put into people’s pension pots to be honest.
PL: That's a very diplomatic way of putting it. The big organisations now breathing a sigh of relief have useful lessons for the SMEs squaring up to the challenge now. Here’s Neil again.
NB: Plan and prepare as early as possible because you will hit problems that are not of your making. There's undoubtedly going to be some little wrinkle, some little specific detail that you haven't quite thought about that suddenly crops up and oh lordy hang on we need to go away and think about this.
PL: And the staging date’s looming.
NB: And then two or three weeks is just swallowed up in dealing with that.
PL: And Kendra.
KO: You know working with our partners we probably could have learnt to speak their language a little bit earlier because we found sometimes difficulties in communicating with them over what our requirements were.
PL: What sort of things?
KO: What would be a change for us if we used just even the word change would mean something different to them.
PL: It’s not your language?
KO: It’s just not and if we used opting-out we were using it within a very sort of specific context of the regulations and that wasn't well understood for quite a long time throughout the whole project team.
PL: So communication, explaining to workers what’s happening, why and when, is one fundamental aspect. Preparation, putting in place the team, gathering stakeholders, drawing up timelines. And finding the funding and so forth is another, which tallies exactly with what KPMG’s Andy Seed has seen.
AS: The most successful projects that we've seen implemented have a common theme and the common theme is they’ve started to plan early but they’ve actually thought and given some time and energy to thinking about who the project team internally should be. The larger businesses would have engaged someone senior from finance, someone from HR, possibly from reward, there might be a dedicated pensions manager. So there could be a quite significant group of stakeholders involved in getting it right, so it doesn’t take a rocket scientist to work out that the earlier you engage those people, the earlier you start setting your policy and how you do it better.
PL: Now of course the challenge for SMEs is that the MD might also be the CFO and the HR and the pot to fund internal developments or external support are likely to be far smaller. If it’s all being done in-house then early preparation is even more key plus, as Andy outlines, smaller organisations are less likely to have pensions already embedded and may need a bit more government support.
AS: The size of businesses that are just about to go through the auto-enrolment process are just starting from a different place to the larger corporates who have pensions ingrained as part of reward culture within their organisations. I guess if there's one thing I'd like to see more of, not so much from the regulator because it’s not their role really to do this but actually from DWP, is to be a bit more educatory in terms of helping businesses who don’t really understand pensions and have never really engaged with them to work out where they start. I think generally that's what will pan out over the next year; companies will have to get to grips a bit more with what pension schemes are, what they’re for and they will need to push this message of why this policy is coming into place.
PL: Next month we're going to be looking at how to bring the business with you on your OD journey. How can you fully involve stakeholders in the design and development process and what are the best ways to communicate OD throughout your organisation? Join me then.
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