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Over half of UK employers think that the government should cap charges in default investment funds under automatic enrolment schemes, says Eversheds

  • United Kingdom


    This finding is revealed in a study conducted by global law firm Eversheds to coincide with the one year anniversary of the introduction of automatic enrolment on Tuesday 1st October 2013. Over 300 employers took part in the study which assesses how employers are faring one year on.

     Key findings from the study showed that:

    • Over half of employers think that the government should cap charges in default investment funds under automatic enrolment schemes. Only 15% of employers said that they should not.
    • 50% of employers that have already passed their staging date said that the number one change that they would like to see made to the automatic enrolment legislation was the removal of the age and earnings eligibility criteria so that all UK workers would have to be automatically enrolled.
    • Around 60% of employers believe that automatic enrolment is a good thing for their organisation.
    • Only 6% of large employers that have already passed their staging date have reduced the pension benefits that they offer to existing staff as a result of the introduction of automatic enrolment.

    Francois Barker, partner and head of pensions at global law firm Eversheds comments:

    “Given the OFT’s decision not to recommend a cap on charges in its study of the DC pensions market earlier this month, it is intriguing to see that over half of employers would like to see a cap applied to the charges that can be imposed on members’ benefits in default funds under automatic enrolment schemes.

    “Steve Webb has indicated that he intends to press ahead with plans to cap charges, despite the OFT’s reservations, and our study indicates that this will be supported by the majority of employers.”

    Francois continues:

    “Overall our survey reveals a number of encouraging signs. One year on from the introduction of automatic enrolment, it is encouraging to see that over 60% of employers believe it is a good thing for their organisation.”

    “The results also indicate that the concerns expressed about the introduction of automatic enrolment leading employers to “level down” the pension benefits that they offer to their staff may have been overstated. Only a small minority of large employers that have already passed their staging date have reduced the benefits that they provide to their staff and the majority of employers are providing more than the minimum.”

    “However, it is also clear that employers would like to see the legislation simplified to make life easier for employers that want to automatically enrol all of their staff. We share this view.”

    The study also revealed that 35% of the employers that had already passed their staging date have found the administrative burden associated with automatic enrolment to be their greatest challenge. Just over a quarter said that updating their payroll systems to assess workers’ eligibility had been their greatest challenge and 22% said that their greatest challenge was preparing auto-enrolment communications for workers.

    A quarter of employers that have calculated the cost of automatic enrolment say that it has resulted in additional costs to their business of more than 5% of payroll. This includes set-up costs, administrative costs and an increase in pension contributions. Around 8% said that the additional costs for their business has been more than 10% of payroll.

    Francois Barker continues:

    “It is clear that the administrative burden caused by automatic enrolment is a significant challenge for employers. In our experience, this is caused primarily by the fact that workers need to be divided into three different eligibility categories under the legislation and then they must be treated differently depending upon which category they fall into. Any changes that could be made to make things easier for employers would be very welcome.”

    “The compliance costs associated with automatic enrolment are clearly an issue for employers and many are taking steps, such as introducing salary sacrifice arrangements, to offset these costs.”

    Of the organisations that have passed their staging date and that knew the number of workers that have left their scheme after being automatically enrolled, around 38% said that more than 10% of workers who had been automatically enrolled since their staging date have subsequently left the scheme (this includes workers who have opted out or left the scheme after the end of the statutory opt out period). 14% said more than 25% of workers who have been automatically enrolled have since left the scheme.

    Francois Barker comments:

    “Our study suggests that the number of people leaving their pension scheme after having been automatically enrolled is somewhere between 10% and 25% on average. This is higher than the DWP’s opt-out statistics. However, the DWP’s statistics do not tell the whole story because they do not include workers who leave their scheme after the one month statutory opt-out window has ended. That said, leaver rates are still significantly lower than anyone predicted before automatic enrolment was introduced and this is clearly good news.”

    Francois Barker concludes:

    “One year on from the launch of automatic enrolment, the message from employers seems to be so far so good. Automatic enrolment is generally seen as a positive thing and large employers have embraced the challenge of updating their systems, setting up new schemes and encouraging their staff to engage with pensions saving.”

    “However, the industry cannot rest on its laurels with 1.5 million small and medium sized businesses still to comply. The Government and regulators also need to take further steps to ensure that workers who are automatically enrolled do not find themselves old and broke when they retire.”

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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