By the end of this year, almost 215 of the largest charities will have complied with the duty to auto-enrolled their employees. Another 25,000 will do so by 2018. We’ve spoken to some of both groups to understand more about the sector’s experiences and readiness and to pull together some top tips.
A key message in a recent DWP review of organisations that have already complied was to avail of opportunities to learn from others. Our ‘how-to’ guide will help charities to do just that and walk you through the key steps. So, what are the key lessons CFG are flagging up to the sector?
1. Take time to be prepared
Awareness of auto-enrolment among charities and confidence in ability to meet the requirements appears to be high. Overall 76% of respondents said they were confident or very confident in their capacity to implement it. Of those auto-enrolling in 2014, it was 84%. For smaller charities, auto-enrolling in 2015 or later, this was notably lower but still high at 63%. We’d like to think this is because most of the respondents are CFG members, and we’ve been briefing them about the steps they’ll need to take for years.
Awareness alone is a good start. But we’d urge charities with less than 30 employees not to underestimate the scale of the task at hand, and to take time to understand the requirements. Our survey showed that 83% of charities enrolling in 2015 or 2016 had not yet put a plan in place. The general advice from experts and charities we spoke to was to begin preparing at least 9-12 months in advance of ‘staging’.
2. Don’t assume your pension providers will operate your existing pension on same terms for auto-enrolment
A surprising number of charities told us they intend to use their current DC scheme for auto-enrolment; almost 70%.
For charities with high levels of take up currently, it may appear to make sense to offer the current scheme at current contribution levels as any additional take up costs will be minimal, and there may be an expectation that people who haven’t joined will opt-out. In these instances using the current scheme may appear to be a logical step. But we know this isn’t always easy in practice. Many pension providers are changing the terms for auto-enrolled employees. We would urge charities to check with their pension providers and to conduct the necessary due diligence.
3. Costs can be higher than anticipated
Auto-enrolment costs! 70% of charities responding to our survey had less than 60% of employees in a pension scheme and 47% have less than 40%. In these cases, auto-enrolment at 1% may mean a big increase in cost (or may result in a need to offer less generous contributions.)
Costs come in other forms too – staff time, engaging employees, systems and charges!
4. Contribution levels may end up being high
In our survey, 50% said they will auto-enrol on the current employer contribution basis. 20% of respondents report current contributions as being 5%, 30% as being 6-7% and 18% as being 8-10%.In practice, we think it likely that more charities will opt to auto-enrol closer to minimum contribution levels, as the experience of those who have already passed their staging date seems to suggest.
5. Opt-out rates can be low
This is what every employer wants to know, as assumptions about opt out rates have a significant impact on costings. DWPs early estimates were 20-40%, with RBS reporting 40% opt out in early 2012. However, 18 months in, opt-out rates in practice are decidedly lowers, at 9% (or ranging from 5-15% in the 50 employers they spoke to) according to the latest figures from DWP. Nonetheless, it’s early days. 50% of charities told us they expect less than 10% of staff to opt out. It is worth charities planning now for low opt-out rates. But as pension contributions are phased in over the next five years and employees are asked to contribute more, this may well change.
6. Know your charges and governance
53% of charities told us their schemes have an annual management charge of greater than 0.5% (the “average level for NEST members”). While the current Government consultation to cap management charges (at 0.75%) is welcome, we remain concerned that there is a big risk members will be auto-enrolled into “poor value” schemes.
More worryingly 40% say they don’t know what their management charges are!
On governance generally, 21% of respondents said they review their investment strategies and aims of the default investment option annually, 20% say every two to three years and almost 50% of respondents confirmed that they do not review at all. Almost 50% appear to have no formal governance arrangements in place. We would urge charities to question whether their DC schemes are well run.
So with those key points to look out for - the next step is to go away and plan. And what better to use as your starting point than our new guide!
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