Hopefully by now the vast majority of employers (and certainly all those that are regular readers of this newsletter) are aware of their obligations under the auto- enrolment legislation.
It seems a little strange to me that so many of the larger employers have gone public with the decision that they are going to be using their existing defined contribution schemes as the basis of compliance with the regulations. Of course this should be the first place to look for a solution but it is worthwhile taking time to consider why you would want to expose your good quality pension scheme to the risk of auto- enrolment contagion.
If it is a bundled pension arrangement it is highly likely that the provider will have priced the scheme based upon the expected membership at the time. Fundamental to the terms given would have been the average contribution and the length of time over which the provider would recover its costs and make a profit. It is not uncommon to hear that providers require a policy to be in place within these good quality arrangements for 12 years or more before it becomes profitable.
It is likely that those employees who are automatically enrolled into the scheme, whether they are those that were not previously given access to the scheme or elected not to join, will be those with a lower average contribution level than that currently being paid, thereby reducing the profitability for the provider. Many of you will not necessarily be too concerned about that, but it might cause concern if those providers eventually withdraw from that part of the market. Perhaps the immediate worry should be whether the terms of the current arrangement carry a clause giving the provider the right to amend it if there is a material change in the membership. This could lead to changes in the underlying terms applied to the members' policies. This might in turn lead to an interesting exercise in communication, or perhaps a reduction in the amount of commission paid to cover adviser costs requiring the company to pay a fee.
However, the impact of the auto-enrolment of these members might run much deeper than the charges. It is a fact that a large number of the automatically enrolled members will not even receive a pension income from the policy if they only benefit from the statutory contribution amounts. Calculations show that anyone with earnings around the national average will need to be in the scheme continuously for about 12 years before their funds exceed the current triviality limits. If they are paid £15,000 a year this period is extended to 20 years. If the benefit levels are below this level they can encash the funds and walk away from the scheme with a lump sum payment.
At least they may feel they got some benefit from being in the pension scheme. Will the other members feel the same way when they are not allowed to take the majority of their funds as a lump sum but are forced to take an income? On the current rules someone with a fund just £1 under £18,000 could take a lump sum of approx £15,300 net. Someone with a fund £1 over will get a lump sum of £4,500 and a taxable income of about £14 per week.
It is unlikely that those members will feel so enthusiastic about the quality of the pension plan that they have been a member of and as is often the case such negative associations seem to fester and spread until the worth of the whole pension scheme comes under question.
Maybe it is better to isolate the auto-enrolment solution for the sake of a healthy pension scheme?
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