Auto Enrolment, The Brave New World?



Posted on: 31st July 2014

So, were rolling out Auto Enrolment (AE) to the masses and everyone employed is to have a pension, excellent, job done! Or is it?

Auto Enrollment has been deemed a success to date with an approximate 85% take up rate and compliance with staging dates, in the main, met. But is this the calm before the storm? Over the next 18 months we will see the S in SME’s come to the Auto Enrollment table. Companies with less than 50 employee’s.

To date Auto Enrollment has dealt with the biggest of employers, all with HR teams, payroll departments and big accountancy firms to lean on. Will the take up rate and employers compliance with staging dates remain reassuringly high? I have my doubts.

In fact, are the owners of smaller companies even aware of their new responsibilities in any great detail? My experience says the majority are not.

With as many as 140,000 companies per month staging in 2015 my fears are that we are heading for a car crash without a lot more public awareness campaigning by The Pension Regulator and its like.

However, lets be positive and assume the best of outcomes and that employers embrace their new found responsibilities and successfully undertake the Auto Enrollment process. Excellent, job done? Well, in my opinion, far from it.

If all goes well, by the end of 2016, we will have millions of employees contributing a matched 1% of earnings (which for the difference a 2% contribution will make to their retirement may as well be 0%) into a retirement plan. Yes, but they won’t crucially appreciate WHY. AE is a process, not an advice process.

The importance of retirement planning will almost certainly not be properly communicated to the masses by any qualified financial adviser. Moreover the vital understanding that their levels of contribution will be vastly inadequate will certainly not be appreciated. It doesn’t surprise me that opt out rates are presently low. After all, would you miss 1% of your gross salary?

As contributions ratchet up to, eventually, 4% of net pay (5% gross) for employees I think that we will then see opt out rates increase significantly. Without fully understanding WHY its very important to save for one’s retirement its all too easy to cease that saving when the level of contribution start to have a meaningful impact on an already stretched take home pay.

Even the employees who stay the course and stick with Auto Enrollment will eventually realise (all too late) that they have successes in building up a fairly meager pension fund which certainly won’t sustain them in retirement. Then, with the new found flexibility regarding pension access that will come fully into affect in April 2015, I predict that we will see these small pots quickly plundered during early retirement.

The missing link in the whole Auto Enrollment process is advice. Advice at outset and, most importantly, advice throughout a working life as to WHY its important to save as much as possible towards the ever increasing spell spent in retirement.

Only through the benefits of sound financial advice will today’s generation create sufficient wealth in sustain themselves through their retirement years. Advice that the Auto Enrollment process seems to have sadly left out.

This all seems fairly negative stuff but in my opinion Auto Enrollment will ultimately prove a futile exercise whilst professional, independent, advice is not included as a vital piece of the Auto Enrollment jigsaw.