SMEs, auto-enrolment and keeping young people engaged

Government figures show 8 per cent of young people in the UK’s largest businesses are choosing to opt out, compared with 9 per cent overall (PW 23/09/13).

Unfortunately, these numbers may not stay so low if small and medium-sized enterprises struggle to replicate the funding and resources behind their larger competitors’ accomplishments.

There seems to be some disagreement about who is going to do the legwork at SMEs. Providers have called on small employers to prepare ahead of time and small-employer representatives have urged providers to help them get ready.

Opting out

The 8 per cent figure may be less impressive than it first appears. Initially auto-enrolment requires just 1 per cent of an employee’s income, a negligible figure for graduates on starting salaries.

Opt-out rates are likely to rise as minimum contribution rates take a more significant cut, putting pressure on young people’s more immediate needs.

This is likely to worsen in 2015 as the first year of students with up to £9,000 annual tuition fee debts enter the workforce and start paying off student loans.

For those SMEs where introducing a pension scheme is entirely new, how they communicate auto-enrolment will set the precedent for their employees’ perception of pensions. Many large companies have not faced this task as there is already a norm of scheme membership among staff.

“There’s a culture within [large] organisations of being members of the pension scheme,” says Neil Latham, principal at consultancy Punter Southall. “Older people set the example and take the lead, saying ‘It’s about time you [had] a pension my son, I’m looking forward to mine, it’s really important.’ You get a naturally supportive environment and you’ve got a committed employer.”

Where pension schemes are new, young people will look for direction from those nearest to them for guidance in this unfamiliar situation.

Figures from Scottish Widows’ latest ‘Pensions Report’ indicate the under-30s consider friends and family to be the people to turn to, to get advice on their pension. In contrast, an older employee would be more likely to go to an independent financial adviser as a first port of call.

After family and friends, 21 per cent of 22-29-year-olds would ask their employer for advice, underlining the influential role that businesses, however small, have over their employees.

Clear communication is key for SMEs trying to get staff in support of auto-enrolment. Research from Nest reveals one of the most likely reasons for workers to opt out would be a lack of information at their time of enrolment, with 79 per cent saying this could cause them to opt out.

Comms balance

SMEs must strike a delicate balance between the level of information required for understanding and information overload. Young people in particular may have no prior knowledge about pensions.

Signing this generation up to auto-enrolment cannot be considered a success unless they understand fully what their contributions amount to when it comes to retirement.

“Cutting down the literature you receive is very important; your typical insurance company normally drowns people in paperwork. There is a lot of legislation around pensions and so you have to include fairly technical ideas. It’s down to providers to communicate as clearly and simply as possible to people. It’s something the industry as a whole needs to work on,” says Laith Khalaf, head of corporate research at investment provider Hargreaves Lansdown.

Recognising there is room for improvement is not difficult; the greater challenge lies in identifying who is responsible for sorting it out. With large firms’ low opt-out rates having gained them a nod of approval, SMEs now find themselves unwittingly in the limelight.

“I hope the providers will offer employers something simple and easy to understand that we just have to pass on to our employees,” comments Mike Cherry, national policy chair at the Federation of Small Businesses.

“We have very clearly said [that] because many small business owners don’t themselves understand pensions, that it should not be down to the employer to either choose or advise.

“It should be down to the pensions industry to get its act together, to put out clear and transparent advice about what is on offer and whatever fees may be incurred over the lifetime of any particular scheme. That’s where we have the biggest issues,” Cherry adds.

Small employers must be prepared for the inevitable flow of young employees looking to them for guidance.

Active discouragement

Some have speculated that dissatisfied SMEs are likely to dissuade their employees from auto-enrolment, despite this being against regulations.

There are concerns that employers’ contributions into staff pensions could affect potential pay rises in the near future or, in some cases, may lead to job cuts.

“There is the worry that we don’t speak about: many small employers will be quite keen to try and ensure their members don’t stay in the scheme,” says Malcolm McLean, consultant at Barnett Waddingham.

“There are certainly ways an employer can influence people in that respect, for example [by] saying they can’t guarantee a pay rise next year and one of the factors for that is that they’re having to contribute to auto-enrolment.”

According to the FSB’s Cherry, talk of active discouragement is merely a red herring. “Most small employers genuinely want to enhance what they offer to their employees. We recognise very clearly that people have got to save more for their future and we’ll do everything to help and make this happen.

“But the industry needs to help us to help ourselves and this hasn’t happened to date. Hopefully lessons can be learnt in time for the bulk of small businesses so it can be an easy process and people actually understand what’s happening.”