Personal Accounts: Section 5: What this will mean for employers?

82. The Pensions Commission argued that all parts of society share the responsibility for tackling the problem of undersaving for retirement. Individuals would need to save more, the State would need to spend more – but employers would also have to increase their contributions.
83. Historically, employers have played a significant role in providing pensions. The existence of workplace pension schemes created a suitable product, and the efforts which employers (and trade unions) made to encourage people to join helped overcome inertia.
84. Many employers are committed to continuing to play that role, and the Government will continue to support them. However, the Pensions Commission made clear that pensions policy could not be based on the expectation that all employers would fulfil this role in the future.

    The minimum employer contribution

85. In the May 2006 White Paper the Government announced the introduction of a minimum employer contribution of 3 per cent on a band of earnings. This contribution is the central pillar of this package of reforms. Without it, employees would not have a sufficient incentive to save. The contributions from the employer, together with tax relief, give workers a good expectation that saving will be worthwhile. Without this confidence, automatic enrolment on a large scale would not be possible. And without both these factors, we would not be able to increase participation in private pensions.
86. The role of employers is, therefore, crucial in making this policy work. However, the Government recognises that business will need time to adjust to this and employers will, therefore, be given enough time to adapt through the early provision of information about their new responsibilities and through the phased introduction of contributions. The employer contribution level will be set in primary legislation, to give employers clarity and certainty about the rate.
87. Our research shows that employers are supportive of the reform package and accept that they have a role to play. Around two-thirds of employers thought that a minimum employer contribution level of 3 per cent was either about right or not enough, and six in ten organisations with less than 50 employees thought automatic enrolment was a good idea, rising to eight in ten employers with 250 or more employees.⁴² Nonetheless, employers will face increases in costs: our research suggests that these will be around 0.7 per cent of labour costs on average.
88. The priority is to design the scheme and the transition phase so that burdens on employers are minimised. The Government is determined to ensure the system is operated in a way that imposes minimum administrative burdens on business.

    How will the employer contribution work in practice?

89. These reforms must meet a basic test: they have to be simple to run for a small employer, such as the corner shop or plumber who will be covered by this scheme. The first decision for the employer will be whether they want to continue, or start, to provide a pension themselves. If they decide not to do that, they will be required to pass on 4 per cent from their employee’s salary to the clearing house and match that with a 3 per cent employer contribution. The need to keep this a light-touch process is one of the two key reasons why a clearing house is necessary to implement personal accounts: as well as ensuring portability of pensions for employees, it will mean that employers need have only one point of contact for transferring these contributions.
90. We will task the delivery authority and then the personal accounts board with the objective of minimising the administrative burden on employers. This will be a key factor in the design of, and contracting for, the clearing house. The delivery authority will consult closely with employers on how to do this, including on whether the clearing house could build on existing collection mechanisms.
91. Some consultation responses, and some of the models which we considered, recommended that the employer should give advice to their employees about which provider to choose, or which funds to invest in. However, consultation with employers has clearly shown that a majority of employers do not wish to do this. Personal accounts will be designed so that employers are not required to give such advice.

    Scheme exemption

92. The Government wants to support employers who choose to offer their own pension schemes. That is why we are proposing to exempt employers from the requirement to automatically enrol their employees into personal accounts if they operate a scheme of broadly equal, or better, value to personal accounts and automatically enrol employees into it.
93. We want to make the exemption process as light-touch as possible. Our consultation with employers over the summer identified ways of achieving this for occupational schemes. The test for most defined benefit schemes will be based on the existing scheme reference test, which employers already use to decide whether to contract out of the State Second Pension. The test for defined contribution schemes will be based on the employer providing contributions at the same level as personal accounts. In both cases employers will be able to check, in consultation with their scheme or provider, that the scheme qualifies for exemption and then certify that it is exempt.
94. Many consultation responses expressed concern that personal accounts would result in some employers already offering a scheme levelling down to the 3 per cent contribution level. The Government takes these concerns seriously and this White Paper suggests some ways to minimise the direct effect of personal accounts on existing provision. In particular, we are consulting on whether companies that offer higher-value schemes should be allowed to have a reasonable waiting period. This would allow them to continue to use their pension scheme as an incentive to employee loyalty, and could encourage employers to level up to that higher contribution level. The Government is also interested in working with the industry on the National Association of Pension Fund’s (NAPF’s) suggestion of a ‘good’ pension scheme kitemark to help employees identify companies that offer such pensions.

    Waiting periods

95. The May 2006 White Paper consulted on whether there should be a waiting period before automatic enrolment. A number of responses to the White Paper argued for a waiting period of six months or even a year. We will continue to consult on this issue, but there is strong evidence against having a waiting period:

    • Employer groups were split on the issue of a waiting period, with a number arguing it would be a greater administrative burden for employers to have to remember to enrol employees at a later stage, rather than on joining.
    • Most existing occupational schemes do not have waiting periods, with only 16 per cent operating one.⁴³
    • A waiting period of six months could reduce pension funds by 10 per cent: a waiting period of a year by 20 per cent.
    • A waiting period would disproportionately affect temporary workers, and therefore undermine our goal of making pensions portable between jobs.

96. Given that it could undermine a key goal of our reforms, we are not proposing a formal waiting period in personal accounts.

    Compliance

97. The new rights for employees to be automatically enrolled into either a personal account or into an exempt work-based pension arrangement, will be protected by a light-touch compliance regime based on:

    • educating employees about the value of their new rights and employers about their new obligations;
    • enabling employers to comply through processes and helplines designed to support them; and
    • enforcing compliance by the minority of employers who deliberately fail to meet their legal obligations.

98. We will be consulting further on the detail of the compliance regime. We expect to build upon the model used for enforcing the National Minimum Wage, which combines the right of employees to take their case to an employment tribunal with whistle-blowing and risk-based investigation. To ensure minimal impact on the majority of employers who will do their best to comply with the new requirements, personal accounts will be designed to allow cases of possible non-compliance to be identified by remote data matching in the first instance.
99. Employers are keenly aware of the long-term challenges that are facing the pensions system. If no action were taken today, employers would risk facing increased taxation in the future to prevent coming generations of pensioners falling into poverty. Personal accounts are intended to prevent that problem. It is in the shared interest of employees and employers to act now. Moreover, the overall impact of our reforms is predicted to increase Gross Domestic Product (GDP), because of the increase in savings and the growth in employment from raising the State Pension age. We will continue to work closely with employer groups to ensure this new responsibility is implemented effectively and efficiently.

    “The EEF welcomes the assistance that the Government states in the White Paper it will be providing for employers, particularly having the minimum employer contribution into the new pensions saving scheme set out in primary legislation and the phasing in of both employer and employee contributions over three years.” (Engineering Employers’ Federation)

42. Bolling K, Grant C, Fitzpatrick A and Sexton M, 2006, Employer attitudes to personal accounts: Report of a quantitative survey, DWP Research Report No 397.
43. Source: Supplementary analysis of data from the Government Actuary’s Department, Occupational Pension Schemes 2005.