HC1494 Work & Pensions CommitteeWritten evidence submitted by the Confederation of British Industry (CBI)

1. The CBI welcomes this opportunity to submit evidence to the Work and Pensions Select Committee ahead of the entry into force of auto-enrolment from October 2012.

2. It is clear that the present rate of pension accrual, both private and state combined, will leave many individuals with inadequate pension pots in retirement due to under-saving. The reforms are designed to address this by giving all employees a basic minimum level of saving delivered through their employer. This new national approach is designed to combat widespread scepticism and inaction about long-term savings. This is especially true of lower earners, who feel they need to prioritise pay in the short-term to the detriment of longer-term savings provision, especially where they work for a firm that does not currently offer pension provision. The disincentive to save is compounded by the complexity of the UK pension system—many individuals have little idea how to negotiate their way towards better provision. The Pensions Commission recommended auto-enrolment as an appropriate policy response to break down these barriers—a view the CBI endorses, and one which we recommended as part of the work of the CBI’s 2004 Pensions Taskforce.

3. The Commission also recommended employer compulsion, which was not the CBI’s preferred solution to improving provision—compulsion often leads to satisficing, not the growth of a more vibrant long-term savings culture. The current solution is a compromise, however, where no group had its proposals accepted in full. We believe that the outcome of this—especially after the inclusion of the cost and red tape reducing changes set out in the current Bill in response to the Johnson Review of last summer—represent a credible approach that all can live with.

4. In this submission we set out that:

in the current economic context, phasing and staging are essential to the regime’s success;

a strong communications strategy from DWP and the Regulator must be at the heart of auto-enrolment; and

NEST has an important role to play as a public service duty holder – but it must not damage long-term saving.

In the Current Economic Context, Phasing and Staging are Essential to the Regime’s Success

5. Auto-enrolment was designed at a time when the UK and the broader world economy was strong. After the recession, this picture has changed significantly. With sluggish growth expected over the next few years, companies’ cashflow is likely to remain under pressure for some time to come. Some have called for delaying or reforming the programme in response to this. The CBI did consider this question, but the mitigating measures achieved by business in the preparation of the plan—phasing and staging mechanism—reduce and delay the reforms’ impact. This was a nice-to-have in 2007, but it is now essential. Without them auto-enrolment would be unaffordable for employers. The further changes introduced by the Johnson Review in 2010, in particular the three month waiting period, will also help reduce the financial and administrative impact on employers.

6. The CBI welcomed the previous Government’s decision to phase-in the employer duty. We regard this as essential to business support for the regime. A 1% minimum employer contribution rate until September 2016, with 2% until September 2017 and finally 3% from then on will allow employers—especially the smallest firms—the time they need to plan ahead and absorb as much as possible of this cost into pay systems. It will also force a lot of the cost of the programme away from the current economic turbulence. Alternative strategies would mean that a sizeable proportion of companies would experience a contributions “cliff-edge” when they reached their staging date, moving immediately from 0% to 3%.

7. The CBI also welcomed the decision to stage the dates at which companies will become subject to the reforms. Smaller businesses are currently less likely to provide occupational pension provision for employees and will need longer to prepare and budget for the changes—in this regard, staging on the basis of payroll size is justifiable and is another way in which the plans allow for the needs of the smallest employers. There have been suggestions directed at the DWP that the staging framework is too complex, with new firms joining every month rather than at common commencement dates in April and October. CBI members believe that the proposed monthly timetable is workable because employers will be given sufficient notice to prepare. It is certainly a more manageable system for the Pensions Regulator, which will have to register each new employer. CBI members favour a steadier build-up of registrations, as this will put less strain on the system and help avoid embarrassing teething issues. It also means that smaller firms will not see the reforms introduced until 2014.

8. The economic context is vital, but the effect of phasing and staging is to make the question of delay now more one of whether the approach is right, rather than the immediate cost. CBI members accept this, but costs will rise in 2012 however and one thing government can do is increase firms ability to cope, for instance by reducing the minimum wage award for next year to take account of the additional cost.

A Strong Communications Strategy from DWP and The Regulator must be at the Heart of Auto-enrolment

9. The CBI accepts that lower than previously expected take up of auto-enrolment in the early days is likely due to pressure on household incomes. But we strongly believe that the situation will improve as the economic situation improves and that this is not something that undermines the basic structure of the reforms. In the meantime, both DWP and the Pensions Regulator must focus on selling the changes from next year. They must provide the right environment for industry to develop attractive and affordable products that react to employers’ and employees’ needs.

10. The Pensions Regulator must also ensure that the compliance regime works as smoothly as possible, minimising the administrative burden for employers. Employers should be able to self-certify their scheme easily so they are led to level down contributions to make it easier to comply.

NEST has an Important Role to Play as a Public Service Duty Holder—but it must Not Damage Long-term Saving

11. The National Employment Savings Trust (NEST) plays a central role in the auto-enrolment framework. Its existence is necessary for the framework to succeed in coverage, but the arrangement should not be co-dependent. CBI members acknowledge the need for a low cost savings vehicle for those whose employer does not offer their own scheme – but it should not replace the wider pensions industry. Its focus should be on those not yet served. From the employer perspective, especially SMEs, NEST will be valued as a good default scheme for businesses taking their first steps into the world of pensions. The CBI has been encouraged by NEST’s efforts to ensure that the scheme is soundly based, with a well-designed investment approach that should assuage any fears employers new to pensions might have about choosing an adequate scheme for their employees.

12. The CBI supports NEST and believes that it can succeed in its function if its focus remains on fulfilling its public service duty. All applicants to the scheme will be accepted under the public service obligation that is rightly built into the scheme’s design. But to attract and retain them, it must also ensure its charging structure is attractive to low-earners. We have commented publicly previously that the contribution charge makes NEST unattractive in the first years, and would prefer a different approach.

10 October 2011

Prepared 13th March 2012