October pensions supplement: Interview with the pensions regulator

Rather than pushing citizens into making decisions, governments have, in recent years, taken to “nudging” them towards better choices. This notion of nudging led to the establishment of a “nudge” unit within Downing Street, intent on tilting the floor beneath the population’s feet to gently encourage their movement in a direction of the government’s choosing.

One of the most significant manifestations of the nudge technique has been in pensions. Company pension schemes have always had the essential characteristic of being “opt-in,” that is, you are only in if you want to be. But the nudge principle, when applied to pensions, suggests that it would be much more effective to make pensions schemes “opt-out,” so that employees are automatically enrolled in the company scheme unless they say otherwise. The intention is to create conditions such that more people in Britain save for their retirement. This is the thinking behind Britain’s new auto-enrolment company pension scheme. But has it worked?

“We are very encouraged about take-up,” says Charles Counsell, the Executive Director for Automatic Enrolment at The Pensions Regulator. “We’ve got through all of the large employers,” he says, adding that over 99 per cent of all companies have signed up to the scheme without the need for regulatory intervention. “That means over four million people are now saving into pensions who weren’t previously.” According to the Department for Work and Pensions, the opt-out rate is a mere 9 per cent.

The introduction of auto-enrolment pension schemes began in 2012 and has been staggered. Larger companies were required to set up schemes first. But in the coming two years, small and micro employers, that is companies employing fewer than 50 employees, will begin enrolment. At this point, the number of companies being brought into the scheme will be very substantial. The Pensions Regulator estimates that between January and April 2017, 215,000 small companies will join the scheme and that by the time the enrolment process comes to an end in 2018, a total of 1.3m companies will have enrolled. Is the pensions market up to the task of providing this amount of new pensions products?

“I think so,” says Counsell, who says that despite the high volume to come, the market will be able to provide new suitable products to meet expanded demand. And are small companies going to be able to manage their pensions funds and do so efficiently?

“The key to this is that those employers start to prepare early,” says Counsell. “We’ve starting communicating with employers directly, with any employer 12 months before their staging date. The staging date being the date that the duty applies to that particular organisation. And we believe that they should start to look at this 12 months before and that they should prepare in good time.”

The new pensions scheme would be “very akin to the sort of thing any employer currently runs with operating a payroll,” he says. In expenditure terms, the biggest single outlay will be for new software, which will cost around the same as standard payroll software, which is typically based on a per-employee rate.

The other cost to the company of auto-enrolment is made up of the pension contributions themselves. Contribution levels start at 2 per cent, where both the employer and employee contribute 1 per cent. As for the higher contributory stages, Counsell explains: “When it goes to 5 per cent, that is 2 per cent by the employer, and 3 per cent by the employee including tax relief. And when it goes to 8 per cent, it’s 3 and 5 respectively, and of that 5 per cent, 1 per cent is in tax relief.”

“Where we have got concerns,” says Counsell, “is where employers leave it late, leave it to the last minute.” And are many small companies likely to be unprepared? “The proportion of micros that currently know their staging date is not high enough,” he says. The worry is therefore that the huge numbers of companies that are expected to make very specific and detailed provision for their employees may fail to do so.

There is also concern among pensions experts that auto-enrolment funds may be unattractive for investment specialists. The government has capped the fees that may be earned from managing auto-enroled pensions funds at a maximum of 0.75 per cent. This, combined with the substantial regulatory burden that comes along with auto-enrolled pension investment has made some in the City look askance at the opportunity.

Counsell is clear that the aim of auto-enrolment is being met. “The opportunity to get so many millions of people to begin to start to save for their retirement, is just fantastic,” he says. “It is really transformational in terms of the way the people of this country save for their retirement.”