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Auto enrolment defines the gloom mongers

3 July 2018

It is not only Brexit that has so far defied widespread forecasts of doom and gloom! Before the implementation of the Government’s pension auto enrolment programme in 2012 commentators commonly predicted that take-up rates would be anything between disappointing and derisory.  

But, according to figures recently released by the Department for Work & Pensions (DWP), pension participation rates from eligible employees rose to 84% in 2017 – up from 77% in 2016. The annual total amount saved in 2017 also rose by £4.3 billion over 2016 to 90.3 billion.¹

This is certainly a contrast to the pre-auto enrolment low point when only 55% of employees were saving into a workplace pension – equating to only 10.7 million employees compared to 17.7 million now.¹ But, as with Brexit, no-one can afford to be opening the Champagne just yet because there are some significant potential storm clouds on the horizon. All of these figures refer to the era when minimum contribution levels were only 2% (at least 1% of which had to be the employer’s contribution.)  

This April the minimum contribution level rose to 5% (of which the employer must contribute at least 2%) and in April 2019 it is set to jump further to 8% (of which the employer must contribute at least 3%.) Whilst it is too early to assess the impact of even the most recent hike, it would be naïve to assume that these changes will do nothing to deter pension saving. After all, we are due to have a total contribution rate that is four times higher than the one people have become used to!  

However, we should still be experiencing a much higher overall volume of money being pumped into the pension system and this will inevitably change the way the landscape is managed.

There will, in particular, be added responsibility for employers to ensure that the workplace pension scheme they have chosen remains appropriate. You can bet your bottom dollar that The Pensions Regulator will to start breathing more heavily down their necks in this regard.  

There will almost certainly be a tightening up of the regulatory requirements for employers to have proper processes in place for reviewing their schemes, and reviewing the default investment fund is likely to figure prominently amongst these.  

Many employers are under the mistaken impression that their responsibilities towards their default fund ended once they had selected it at outset. But it should ideally be reviewed every year to ensure that it remains the most suitable option, and at least every three years as an absolute minimum.  

As with other aspects of their pension scheme review, they may well need expert advice in this area. The tasks involved will include benchmarking the fund against its competitors and ensuring that it remains appropriate to the needs of the workforce and to the prevailing economic environment.

Fortunately, Chase de Vere is well placed to help as it offers a Scheme Governance service which can handle these and the other important components of a robust scheme review.   

We will assess the default fund annually, paying due attention to factors such as its performance, asset allocation and the financial strength of its provider.    

Even if past performance has been good, the current asset allocation may not be appropriate to many employees. We are, for example, concerned about one major fund management group that currently has an exposure to equities of around 85%.    

Complications with Brexit or merely the consequences of a cyclical stock market downturn could quite conceivably see equities tumble in value by 30% to 50%, and this may not be a risk that many employees in this provider’s default fund are prepared to take. So it may be more advisable to have greater diversification between other asset classes like bonds, property and cash.     

We will also conduct regular more general pension scheme audits, deal with legislative requirements and ensure that the scheme is equipped to adapt to changes in the pension landscape further down the line.    

If you would like to find out more about how our Scheme Governance service can help you then please do not hesitate to contact us on 0345 300 6256 or complete this simple form and we’ll call you.  

Source: ¹ Assets Publishing Service  

The Financial Conduct Authority does not regulate some elements of Automatic enrolment.