The National Pension Savings Scheme (NPSS) White Paper was published just before last Christmas, with little fanfare. There has been surprisingly little reaction to a document that represents a massive sea change to corporate pensions provision in the UK.
It’s easy to suspect that the main reason for this is the ‘ostrich’ approach. The pensions industry is always nervous about change, and has therefore buried its collective head in the sand, rather than provide useful comment to HR professionals.
This approach is, to say the least, unfortunate, as NPSS will impact on every UK employer in some way. Indeed, for many, it will represent a significant rise in costs, not to mention an extra administrative burden for the already hard-pressed HR department.
Employers fall into two camps: those who already provide an employer contribution to assist their staff, and those that don’t.
Employers with a company-supported pension scheme may be feeling pretty smug at this point. You already offer a good-quality defined contribution (DC) scheme, and since your advisers have made no mention of the legislation, there is nothing to worry about, right? Wrong.
While the White Paper states that the NPSS is “not designed to compete with existing company pension schemes”, the reality will be different. By its mere existence, NPSS will directly compete with virtually all existing DC schemes. For starters, even where an employer already offers a good quality DC scheme, it may not be sufficient to obtain ‘exemption’ from the NPSS requirements.
The White Paper sets out the likely exemption criteria (for occupational trust-based schemes) as:
At least match the NPSS’s contribution structure
Offer auto-enrolment every three years and for all new joiners
Offer a default fund for investment.
It is highly likely that only a small percentage of existing DC schemes will currently meet all three of the above criteria.
Easily the most significant concern from this listing is auto-enrolment, which is potentially a real swine for the employer. It differs from the usual approach of an employee signing up to join a pension plan. Auto-enrolment (perhaps better referred to as an ‘opt-out’ scheme), requires the employee only to take action if they do not intend to join a scheme. This approach is known to produce a much higher take-up rate and, therefore, an increase in employer contribution costs.
Another, as yet, unvoiced concern relates to scheme charges.
NPSS seems destined to have charges about 50% lower than the original stakeholder cap. This may make NPSS seem disproportionately attractive, given that many DC schemes (even some that will achieve exemption) will have charges well above this level.
Often, higher DC charges exist to allow staff to benefit from financial advice (the adviser being remunerated by commission). If schemes feel compelled to lower their charges to match NPSS, then commission payments will probably disappear. This leaves the employer in the unenviable position of either picking up the advice cost via a fee, or scrapping advice altogether.
Employers without a company-supported pension scheme have been happily drifting along for years. Come 2012, that all stops. Employers will have to auto-enrol staff into the NPSS (or an exempt scheme). If the employee wants in, then the employer has to pay as well.
The auto-enrolment system can only, presumably, be administered at employer HR level, and will need to be revisited at least every three years – in a nutshell, additional cost and work for the employer, with zero recruitment or retention improvement to offset this expenditure.
The ostrich approach may appear attractive in the short term, but a more strategic approach would be to instigate a review of existing pension offerings in 2007, to establish the impact and cost in sufficient time to allow your organisation to forward plan effectively.
By Steve Herbert, senior consultant, Truestone Employee Benefits