The pension journey: auto-enrolment is just the beginning

14th Sep 2010

Auto-enrolment is a powerful remedy for employers struggling to sign up employees to their pension schemes, but it should only be the start of the relationship, according to speakers at AXA’s first Future of Workplace Savings roadshow.

Pension decision-makers from leading employers were given tips from the experts on how to deal with the enrolment challenge, not least the struggle to beat the natural apathy of many employees to put off saving of any kind.

Guests heard the case for auto-enrolment forcefully demonstrated by Tom Stevenson, retired pensions manager for cereal maker Kellogg’s. When he introduced auto-enrolment at the UK division in 2008, membership of its DC scheme leapt from a stubborn 60 per cent to a staggering 97 per cent.

Enrolment is just the first step, however. As speakers, including Stevenson, emphasised; employers must ensure they get a return on the additional investment that greater membership inevitably brings. Communication and engagement were highlighted as essential ingredients of a successful DC pension strategy.

Pension managers are beavering away to achieve all this against a difficult backdrop of ever changing economic, regulatory and political challenges.

Steve Folkard, head of pensions and savings policy at AXA Life, said the current state of the world and UK economies makes it a ‘difficult environment for companies and individuals’ but is optimistic this will encourage employees to value employer pensions more.  He advises employers to remind employees of the advantages of pensions - and in particular tax relief on contributions - over other types of saving.

He said:  ‘The silver lining of the current environment is that issues such as rising unemployment and fear of redundancy lead to more focus on family security and a longer term outlook, which is good for savings and protection.  The first wave will be a focus on debt repayment but a second wave will be a focus on saving.’

Folkard also hammered home the message that employees will only truly value their employee benefits if they have them explained to them properly. 

As all the speakers reminded the guests, communication has never been easier, with many employees having access to the internet and other modern technology - giving employers and pension providers the means to get the savings message across to a wider audience.  Kellogg’s experience (see box 2) also shows how staff pension clinics have a key role to play.

Neil Carberry, head of pensions policy at The Confederation of British Industry, spelt out the pension challenges for both financial directors and HR directors.

He said: "Financial directors have a sense of being burned by their involvement in pensions over the last 20 years - with rising costs, balance sheet volatility and a flat stock market. What keeps them awake at night is the risk to the company – not  just investment risk and longevity risk but regulatory risk. This has led them to a position of supporting certainty in pension costs, mainly through the use of DC schemes."

Carberry added: "HR directors see DC pensions as advantageous too, as they fit in well with a total reward strategy, which suits these schemes. They see business value in offering a pension, in retention and employee engagement primarily. This is a strategy which can be enhanced by life-styling the benefits package to meet employee needs. Increasingly, this will include non-pension products –corporate wraps, ISAs and share plan rollover are among the options. They are also more likely to succeed with differentiation if they communicate its value to employees."

Carberry added that when auto-enrolment is introduced, employers will need to plan around their new legal duties. He said: "They will also need to watch out for the the impact on DC schemes of standards put forward by the Investment Governance Group and increased activity from Brussels, starting with the upcoming green paper."
James Collins, communications development manager at AXA, says employers are always nervous about government changes.  He says:  ‘New legislation such as the proposed National Employment Savings Trust (NEST) scheme always leads to extra cost. Auto-enrolment does drive membership but more members means more cost.’

Importantly, Collins reminded guests that increasing member numbers is not the only goal. He said:  "They may not necessarily be engaged. If they are not engaged, where is the return on investment for you?"

He suggested looking to the opportunities from new media to help with that engagement process, ranging from Facebook to multi-media. He said: "You need to cover all the areas. You need to ask whether a pension is right for everyone at a particular time. Is it right for graduates who have serious debts? A saving plan that lets you save for a house or pay off debt first may be more appropriate. Tailored solutions may be more suitable taking into account the segmentation of customers, ranging from those with no expendable income to those with exclusive wealth."

At AXA, with the younger demographic in mind, they have been developing webinars, webcasts, DVDs, podcasts and in the last 18 months, short video clips in the form of a mini TV series featuring four characters’ and their thought processes about joining their scheme, which can be used on an organisation’s intranet.  They are all modern methods to help engage employees and encourage them to join the scheme.

The roadshow concluded that pensions companies are beginning to realise that long-term finances are no longer just about pensions, as there is debt management and short-term savings goals to consider as well as general investment and healthcare. 

Colin Williams, distribution and marketing director at AXA Corporate Benefits, said: "It is not just about pension provision. For employers, it never has been, but it is a shift for pensions companies. Employees over time will aggregate their assets and debts in one place and be able to have a continuous snapshot of where they stand and what they need to do. They will have access online but with the back up of human beings and the ability to use services such as web chat. This has not been applied much in financial services so far but it is likely to evolve over time."

Barriers to pension saving

People do not always make rational decisions about money, with some even turning down non-contributory pensions. 

The barriers to saving include:

  • inertia (they never get round to filling in the form)
  • procrastination (too much choice and a fear of making the wrong decision)
  • contributions (averse to losing any of their income)
  • immediate gratification (rather have £1 today than £1.50 next week).

Kellogg’s: the full breakfast

When Stevenson joined Kellogg’s in 2003, they were having problems with their pensions scheme. In 2004, this worsened when a £50 million black hole appeared and ‘worried the [***] out of the financial director’. 

Stevenson said: "Volatility was the problem and the FD couldn’t live with it. The solution was to close the DB scheme, which had been around since the 1930s, to new entrants and after a beauty contest we chose Winterthur (now part of AXA) to provide a Contracted In Money Purchase (CIMP) scheme. Employee contributions were set at four per cent and employer contributions at 8%. We also introduced salary sacrifice for DB members to offset the National Insurance Contributions."

He added: "They did brilliant communication, setting up 80 staff meetings and a pensions clinic in each location so employees could discuss their pension plans in confidence. The DB members also took advantage of this and even the chief executive used it as he’d never discussed his pension before. It helped raise awareness."

In 2006, Kellogg’s introduced Cornflex, its appropriately named flexible benefits programme. Stevenson said: "For the first time we able to evaluate for staff what their packages were worth, including holidays, medical insurance and life assurance. It gave quite a few of them a substantial fright. They hadn’t realised before the importance of the large chunk being paid into the pension scheme. It started to take on a bigger significance for them."

He added: "In 2007, our actuary friends started telling us about increased life expectancy so we raised our contributions on DB but because we thought this would impact annuity rates for DC members, we increased employee contributions to six per cent and employer contributions to 10%".

In 2008, Kellogg’s noticed that the DC take up rate was stuck at 60%, even though each new recruit received a 90 minute pension induction that spelt out the benefits. He realised the sticking point was the three-month waiting period for joining the scheme. Stevenson said: "Employees enjoyed three months without contributions so many panicked at the thought of losing £100-£150 off their net pay and so didn’t join.  We had a real problem."

The solution was to tap into the apathy in reverse. He said: "Auto-enrolment was introduced before the first pay was processed. People could leave if they wanted to but we found that they didn’t bother to fill in the papers to get out of the scheme. Hopefully they never will do that as it will be hugely beneficial to be in the pension.’

Recognising that individuals are often reluctant to increase contributions of their own accord, Kellogg’s also introduced ‘Save for Tomorrow’, a contractual obligation for both sides to increase contributions over three stages at salary review time until the full rate is reached. Stevenson explained: "So that when people’s salary increases so too does their pension contribution. Employees don’t feel it. I’m astonished this is not more prevalent."

The company also encourages savers in the Share Incentive Plan, to use the sums built up in the plan to pay into a company Self Invested Pension Plan later. Stevenson said: "A basic rate taxpayer paying in £50 a month, saving for 30 years in to the company AVC and assuming five per cent a year growth could theoretically end up with a of £59,000.  If they put the same monthly amount into the share plan and then later invested in their SIPP, that could turn into £147,300."


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