10th Anniversary - The important role employers have played

This year it will be the 10^th anniversary of Automatic Enrolment – which was first introduced in 2012.

Employers have played a very important role in this ‘game changing’ initiative, who’ve been required to set up a scheme or appoint a provider for their workers, aged between 22 and normal pension age, where they earn £10,000 a year.

Automatic Enrolment (AE) has been very successful and over 1.6m employers have now selected a provider for over 21m employees, who are now saving for their retirement¹. 

However, it’s not job done! In addition to appointing an AE pension scheme / provider, employers continue to have ongoing responsibilities to:

• Pay contributions to their nominated pension scheme / provider, manage requests to join or leave the scheme and keep records,
• Monitor changes in their workers’ age and earnings to see if they need to be put into the scheme, and
• Carry out a re-enrolment exercise every three years. 

But the bigger question is ‘who’s looking out for employees’ and monitoring their retirement savings, performance and providers’ service on an ongoing basis? Are employers getting the best “bang for their buck” in a marketplace for defined contribution pension schemes that continues to develop?

Regulatory framework

Master Trusts, set up to manage AE, are overseen by the Pensions Regulator and go through a relatively robust annual exercise to assess their systems and processes and the value they offer to members, as well as  checking the right amount of capital is held to protect against the Provider’s solvency risk.

Master Trusts are also governed by experienced trustees, many of whom are independent of the Provider, and are held to account by a regulatory framework with which they need to comply including a cap on charges to influence value for money.

Who's looking out for employees?

Each year, members receive annual statements showing their savings and who also have access to the Provider’s Chair’s statement along with other information.

In the output of research conducted by Ignition House which considered members’ views on whether and how annual costs and charges should be included on their annual pension statements, it identified that members recognised it was their employer who chose, who they thought were, a suitable provider for them when their scheme was first set up. 

But, interestingly, the research highlighted that employees also think their employer is continuing to monitor the level of costs, performance and overall value they are getting – which is not currently one of the formal responsibilities that applies to employers.  So, we have a mismatch between what employees saving for retirement think is happening and what’s actually happening!

And, let’s face it, it’s not unreasonable for employees to think that their employer, or at least someone, is formally checking and reviewing the suitability of the provider they chose a number of years ago – particularly since only the employer can change the provider if the employee wants to continue to receive their employer’s contributions.

As a potential warning for UK employers, there is already class action litigation underway in the US based on the idea that company executives may have failed to take action to properly consider and control pension costs charged to their workers. And there’s a US Supreme Court decision from a few years ago that makes it clear that those running company pension plans have an ongoing duty to monitor charges. Francois Barker, head of the pensions practice at law firm Eversheds Sutherland comments “The system in the US is different to the one we have here – and not all of the US experience necessarily maps directly to employers in an AE context.  However, these developments are nonetheless a warning for employers who treat selecting an AE provider for their workers as a “once and done” exercise. What starts in the US tends to end up here!”

Practical Steps

The beauty about auto enrolment is that we now have workers of the very smallest employers, like salons, fish and chip shops and garages, contributing to their retirement through the country’s providers.

But equally, small businesses don’t have the time, money or experience to continuously compare the provider they appointed, against the rest of the market, to make sure their workers are getting the best value.

So who’s doing what and what practical steps could be taken?

Let’s start with the larger employers who appointed an AE provider and who generally have a Pensions Team in their business. These larger businesses may now have an AE scheme with employees’ savings of more than £1bn – and growing fast. 

Typically, to supplement the governance of the trustee board of their Master Trust some have set up their own governance committee to oversee, monitor and make recommendations to their AE provider. Governance Committees differ in their set up but are likely to:

• Look a bit like Trustee Boards (but without the same legal responsibilities) and typically include member representation, independent professional representatives, appointed specialist advisors’ and where formal meetings are held at least quarterly.
• Include formal reporting to enable them to monitor opt out rates, contribution payments, their provider’s admin member service, quality of member communications, investment returns (gross and net of costs), ESG, Net Zero targets, longer term member outcomes, at retirement services and support - and to consider their own ‘value for members’ assessment benchmarked across the market.

Some larger employers might also have an Investment Committee as part of this set up, with the appropriate professional support, making recommendations to their AE provider around their own bespoke investment strategy and stewardship  in a way that is more aligned to their employees and business.

Small and medium sized employers, with limited or no internal pension expertise, may already join employer and member forums and updates arranged by their provider, which keeps them in touch with key developments and gives them a voice. They may also arrange for their existing employee benefit consultant to monitor their provider and ask them do a market benchmark exercise every 3 to 5 years to provide them with the assurance that their chosen provider ‘continues’ to be suitable and offers competitive value for money.

Smaller employers are likely to have used their accounting / payroll provider to help them select an auto enrolment provider. They could ask them to review their provider every 3 to 5 years and report back with any recommendations to provide them with reassurance that they remain appropriate. Over time, as the rate of retirement savings increase, the gap of the purchasing power of individual employers will widen - influenced by the size of their workforce and contribution levels.

Retirement savings matter

A number of employees may be saving money for retirement which, in some cases, they may struggle to afford. So these savings will be so important to them when they retire and will also become even more significant in the future. 

Members’ retirement savings are expected to increase  disportionately in the future – with the payment of both future contributions and investment growth. Between 2015 and 2020 aggregate assets in DC grew from £324 billion to £471 billion (The DC Future Book, 2021 – PPI). This is expected to increase significantly in the future.

Whilst we all lead very busy lives, we’ll all get to the point when the retirement savings we’ve made will influence how well we live in retirement and how early we can stop working, if at all. It’s therefore not unreasonable for workers to have an expectation that their employers do the right thing and monitor the provider, their savings and value ‘for them’ and ‘with them’. 

Resources

Pensions: automatic enrolment - current issues. ¹