HC1494 Work & Pensions CommitteeWritten evidence submitted by Legal & General

1. Summary

1.1 Legal & General are a major provider of workplace pensions to employers of all shapes and sizes. We are pleased to make a written submission to this Work & Pensions Select Committee Inquiry.

1.2 Considerable progress has been made by both DWP and TPR in preparing for automatic enrolment. Although many details remain to be sorted, we feel confident that the launch of auto-enrolment in 2012 will prove successful.

1.3 Certification is an important feature for the 200,000 employers who already run good workplace pension schemes, usually far more generous than the forthcoming statutory minimum levels. It is crucial that the last remaining details of the certification regime are successfully ironed out, but with that proviso we expect certification to enable these employers to maintain their generous schemes for both existing and new staff.

1.4 Our own consumer research suggests that opt-out rates will be around 45%, with particularly high concentrations amongst young workers and older workers being auto-enrolled for the first time. This is towards the upper bound of DWP’s forecast opt-out rate of 20% to 50%, but we remain convinced that the auto-enrolment programme will still achieve much social good even with a 45% opt-out rate.

1.5 It is important that NEST remains closely focussed on its intended market – the sort of small employer that might otherwise find it difficult to arrange a pension to meet their new statutory duties. The contribution cap and transfer ban have been successful in keeping NEST focussed in this way, and it would endanger the programme if they were lifted before the proposed review in 2017 after all employers have set up their first auto-enrolment scheme.

1.6 The pensions industry already has a problem with many small pots, often orphaned when members change address and forget to tell their pension provider. Automatic enrolment will make this much worse. We have an opportunity to change behaviour, so that the norm on a change of employer becomes to take one’s pension with one, rather than to leave it behind and start again from scratch.

1.7 Finally, we would like to draw the Select Committee’s attention to the possible unintended consequences of the auto-enrolment programme. Finance Directors are worried about increased pension costs. If this is coupled with employee apathy, then we could see existing levels of employer contributions cut back and employees mistaking the statutory minimum levels for adequacy. We must guard against this, or we could end up with more savers but less savings.

2. DWP’s communication strategy for introducing auto-enrolment and provision of advice and support to employers and employees

2.1 We welcome DWP’s recent announcement that it will begin public communication on auto-enrolment next January.

2.2 It would be helpful for employers and pension providers to have advance notice of the details of this communication programme, so that they can

(1)Prepare for the inevitable employee questions that this will generate.

(2)Dovetail their own communication efforts to staff to complement the DWP communications.

2.3 Whilst a DWP communication programme in early 2012 will help those people whose employers have an early staging date – which could be as early as July 2012 – it will need to repeated on a regular basis if it is to be of any use to people whose employers have staging dates in subsequent years.

3. Arrangements for phasing and staging the introduction of auto-enrolment

3.1 We support the proposed arrangements for phasing and staging. The spread of staging dates will help the pensions industry to accommodate the workload of brining another seven million people into the world of private pension saving.

3.2 We support the concept of building contributions up slowly for employees who are auto-enrolled on the firm’s staging date. We believe that this will help those new to pension saving to become acclimatised to the loss of take home pay.

3.3 Legal & General’s own staff scheme were one of the pilot schemes that adopted DWP’s programme of automatic pension contribution increases under the last Government. This has been variously referred to as “Save More Tomorrow” and “Pension Increase Pledge”. Amongst those that took the pledge, results were encouraging:

3.3.1Legal & General offered staff who had not previously joined our pension scheme the option of making a “pledge” to begin contributions at 1%pa at their next annual pay review, and to increase contributions by a further 1%pa at each subsequent annual pay review until a target contribution of 5% had been reached. Over five years we achieved the following results:

Stayed with the Pledge until they achieved the target 5% contribution	48%
Stopped part way up, but held contributions at the level achieved	4%
Stopped part way up, and reduced or stopped pension contributions	16%
Left the company before completing the five year Pledge programme	32%

4. Likely impact of auto-enrolment on business, especially small and micro-businesses

4.1 Auto-enrolment is not a one-off exercise. It requires an ongoing commitment from employers to re-calculate pension contributions for those that have been auto-enrolled and have not opted-out, to monitor the age and earnings of those not originally auto-enrolled to spot when they later become eligible and to undertake a triennial auto-re-enrolment exercise to bring any that have opted out or reduced contributions back into the fold.

4.2 In addition, employers have to provide voluntary joining facilities for some employees.

4.3 The absence of commercial payroll packages to assist employers with their auto-enrolment duties has led Legal & General to develop a package to assist employers with their new responsibilities, but we cannot pretend that significant ongoing effort is not required by employers. Whilst large employers will generally absorb this work within existing HR departments, small and medium employers will notice the additional work.

4.4 The smallest employers should be clearly signposted towards NEST, as that was the rationale for spending so much taxpayers’ money on building NEST.

5. Role of The Pensions Regulator, including in certification of schemes

5.1 We have been pleased to have several meetings with the Pensions Regulator and note that they are adopting a pragmatic attitude to their role. We are optimistic that widespread employer compliance will be achieved with a light touch role from the Pension Regulator. We hope that heavy handed steps will only be deployed on a small minority of employers who choose to flout the new legislation.

5.2 Certification is an especially important part of the new regime. Industry data suggests that well over 200,000 employers already have workplace pension schemes. The vast majority of these are far more generous than the statutory minimum levels of contribution. But hardly any of them use the Pensions Commission definition of pensionable earnings, which only starts from pay above £5,035.

5.3 We have never supported the Pensions Commission’s proposals for ignoring the first £5,035 of pay. Thirty years ago a number of pension schemes did use a similar offset, but they all moved on to covering all pay from £1 as they found that the offset was particularly harsh on part-time or lower paid staff, many of whom were women.

5.4 Certification will enable these good schemes to continue as they are, without falling back onto the rather less generous Pension Commission basis.

5.5 However, for employers to go down this route it is essential that the certification process must be streamlined and workable. Otherwise they will abandon their good schemes in favour of the new, less generous, pensionable pay definition.

5.6 Many of the details are still to be resolved, especially around the fine details of what constitutes “basic pay” for the certification process. For example, where an employee has a choice of either receiving a company car for business purposes or a salary supplement with which to provide his own car, DWP are currently uncertain as to whether that supplement counts as basic pay or not.

5.7 We are pleased that DWP Officials are still open to constructive dialogue on the details of certification, and that the Pensions Minister has confirmed his determination to have a workable Certification process.

5.8 We support the concept of also allowing employers to certify against a lower test during the phasing period, as set out in the latest draft regulations. This is an important easement for employers who will be bringing in a large proportion of their workforce under auto-enrolment.

6. Estimated opt-out rates, including the possible impact on NEST if the numbers auto-enrolled are significantly lower than predicted

6.1 Feedback from employers and employees suggests that take up rates will be towards the low end of the Government’s 50% to 80% assumption. Perhaps as many as 45% of employees will opt-out.

6.2 Opting-out will be more prevalent amongst younger workers (who may have competing family related priorities for their money) and older workers (current non-savers who have resisted pension for most of their life and are not going to start now).

6.3 The numbers opting out will be lower if the Government’s ideas for a universal State Pension of around £140pw, as aired in the recent Green Paper, have gained traction by the time employees start being auto-enrolled, as this will significantly reduce the fear that people will lose means tested benefits as a result of saving in a pension.

6.4 Even with a 45% opt-out rate, we believe that the auto-enrolment programme will serve a valuable social purpose, extending pension provision particularly amongst the lower paid, women and ethnic minorities.

7. Likely impact of the limitations placed on NEST, including the contributions cap and the ban on transfers

7.1 We believe that the contribution cap and transfer ban were appropriate and proportionate measures to ensure that the hundreds of millions of pounds of taxpayer’s money that has been given to NEST does not fall foul of EU State Aid rules.

7.2 Despite these restrictions, we have still seen evidence that NEST has recruited a salesforce to target large employers in direct competition with existing private sector pension providers, an action that could still place the UK Government in jeopardy with the EU over State Aid.

7.3 But we are pleased that NEST is also making strenuous efforts to target the smallest employers. These should be its target market, and were the reason why NEST was created – without NEST the smallest employers would find it hard to fulfil their statutory obligation to provide a workplace pension. We have supported NEST throughout its consultation and gestation process as we believe that a successful NEST is vital to the overall success of the auto-enrolment programme.

7.4 The contribution cap and transfer ban should remain in place to keep NEST closely focussed on its target market.

7.5 We note that Government have scheduled a review of these restrictions in 2017 and believe that this will be the right time to consider whether or not they have by then served their purpose.

8. NEST’s potential market share and the possible effects on other providers

8.1 There are over one million small employers with fewer than 50 staff and no current pension scheme.

8.2 Provided NEST is held closely focussed to this target market, it will play a valuable role in the implementation of auto-enrolment.

8.3 This market has proved hard for existing private sector pension providers to service, so NEST can operate here without breaching EU State Aid rules by competing unfairly with existing private sector provision.

9. Whether auto-enrolment is likely to attract new providers and encourage new models of provision

9.1 We do expect auto-enrolment to drive new innovation in the pension market, and this is to be welcomed.

9.2 Legal & General have already launched a master-trust specifically for auto-enrolment, to enable employers to come together and share overhead costs while providing the benefits of trust based governance to their employees.

10. NEST’s investment strategy

10.1 This is essentially a matter for NEST’s trustees, but we do note that NEST has adopted a very cautious approach, particularly for young employees. Logic would suggest that the investments for young employees will be for a very long time, so they are able to take a position higher up the risk/return curve and ride out volatility over the long-term.

10.2 It may be that NEST are not spending sufficient money on member communications to explain the benefits of taking some risk with long-term investments.

11. Possible measures to reduce the proliferation of small pension pots

11.1 We support the continuation of current rules for short service refunds for employees leaving trust based schemes within the first two years, and we are concerned that the Pensions Minister is minded to either stop them or reduce the time limit to one year.

11.2 The availability of a refund encourages more members to join these schemes, and in the new world of auto-enrolment, it will encourage more members to remain enrolled and not opt-out.

11.3 Our experience shows that amongst large schemes (over 1,000 employees) our employers using trust based pensions achieve an average 40% membership whilst those using contract based schemes that do not have the short service refund available the take up is only 25%.

11.4 Looking longer-term, we believe that the current “norm” whereby people leave their pension behind when they change job is flawed. Auto-enrolment will increase the number of abandoned pension pots.

11.5 It would be better if the “norm” was for people to take their pension away from their ex-employer when they change jobs. This could be either to their new employer or to a consolidation vehicle such as a SIPP.

11.6 We hope to work in developing a road map to create a new norm alongside DWP, Treasury and FSA.

11.7 We would not support giving NEST more taxpayer subsidies to act as a consolidation vehicle for small pots, as we believe that the industry has already developed vehicles that can be used for this purpose. What is needed is an appropriate legislative and regulatory regime to support job changers taking their pension with them.

12. How self-employed people, and part-time, temporary, casual and agency staff, will be treated under auto-enrolment; and the equality implications

12.1 Self-employed people are not covered by the auto-enrolment programme. We have a market leading Stakeholder Pension available for purchase over the internet that caters for self-employed people,

12.2 Our auto-enrolment systems and processes will enable employers to fulfil their statutory duties for part-time, temporary, casual and agency staff.

12.3 As a general rule, we encourage employers to use one scheme for all their workers and do not recommend the alternative approach of using a traditional scheme for the regular staff and NEST or some other cut-down scheme for these “fringe” workers. It is our experience that many employees who start with an employer in a part-time or temporary relationship graduate successfully becoming fully fledged and valued members of staff. By putting them in the “main” pension from day one, the employer facilitates this transition.

12.4 We welcome the three month waiting period which will be a valuable easement to employers some of whom would otherwise face a great burden from auto-enrolling, for example, Christmas extras.

12.5 We will assist employers in providing voluntary access to their schemes during the waiting period so that the measure does not discriminate against women, younger employees or ethnic minorities where we understand a slightly higher than normal proportion will be within the waiting period.

13. The extent to which auto-enrolment is likely to achieve the desired behavioural change in terms of encouraging people to make provision for retirement

13.1 There is still much to be done if auto-enrolment is to achieve the desired behavioural change. The DWP and TPR communication programmes will be major determinants in ensuring that auto-enrolment is welcomed by employees and employers and does change behaviour.

13.2 It is important that we guard against unintended consequences following the launch of auto-enrolment. These unintended consequences could include:

13.2.1Employees stopping other forms of savings, like ISAs (Individual Savings Accounts), to pay for pension contributions.

13.2.2Employees mistaking the low level of auto-enrolment contributions for adequacy. In many cases their employers will be prepared to pay higher matching contributions if employees also pay more than the minimum.

13.2.3Employers “dumbing down” or “levelling down” the generosity of their pension schemes. There is a clear danger that some employers will react to greater levels of pension scheme participation amongst their workers by reducing the generosity of pension schemes, to try and keep their total costs unchanged.

13.3 We are supporters of the Pension Quality Mark (PQM), which seeks to help employers with good pension schemes promote the quality of their pension offering to their staff. We are encouraged to hear that over 200,000 workers are now saving in schemes with the Pension Quality Mark and that employers who have been awarded the PQM reporting beneficial effects on recruitment and retention and good employees.

24 August 2011