AEGON's Regional Director in the UK Iain Stringer explains how the UK pension system will change profoundly after the 2008 Pensions Act.

1. MANDATORY AUTO-ENROLMENT IN THE UK – TURNING A
CHALLENGE INTO AN OPPORTUNITY
Iain Stringer, Regional Director UK, Ireland and Nordics, AEGON Global Pensions
In October 2012, the UK pension system will change profoundly, as
new employer responsibilities introduced in the 2008 Pensions Act
come into force. The new pension reforms are intended to encourage
people to start saving and to save more for their retirement, and the
main way that the UK government is trying to achieve this is by making
employers take responsibility for ensuring that their employees are
saving for their retirement.
Employers’ new responsibilities consist of auto-enrolling their employees into a pension plan (either
the employer’s sponsored pension plan or the new National Employer Savings Trust (NEST)) and
making compulsory pension contributions.1 Companies with operations in the UK need to be
prepared for these changes, come what may, but they also present an opportunity to reassess and
improve pension provision. Auto-enrolment is one of the biggest opportunities to help address the
continued lack of engagement and under-provision in the critical area of long-term savings.
Workplace pensions reform in short
To encourage more people to save for their retirement, the UK government has placed new
responsibilities on employers as part of their pension reforms.
1.3m employers will have new duties
750,000 employers presently have no pension provision; 250,000 employers have plans where
the employer contributes less than 3%
About 10 million people will be automatically enrolled
Opt–out rate will vary by industry and geographically
Extensive set of new rules for employers to comply with
The UK Pensions Regulator is responsible for compliance
Major changes to contribution collection and how people join
Increased record-keeping
Employers will need help to comply with the new rules.
In addition, the UK government has established The National Employer Savings Trust (NEST), a
simple default defined contribution savings plan focused on low to moderate earners, who presently
1
For a detailed discussion of the UK pension reforms, see
http://www.aegonglobalpensions.com/en/Home/Publications/News-archive/News/Pension-reform-in-the-UK--
Getting-ready-for-auto-enrolment/. See also the AEGON pension reform website at http://www.pensionsreform.aegon.co.uk/
1 May 2012

2. have little or no pension provision.2 In order to maintain the focus on its target market, contributions
will initially be capped at £4,200 (today’s terms). NEST must accept all employers who apply to join.
NEST has low charges (0.3% annual management charge and 1.8% contribution charge) and offers
a subsidised Government loan for start-up. NEST is a no-frills solution with an implicit Government
‘stamp of approval.’
Introducing auto-enrolment
The sooner individuals start saving for their retirement, the better. For this reason, the UK
government has introduced mandatory auto-enrolment, which means that employees are
automatically enrolled into a pension plan. To be precise, any jobholder aged at least 22 and under
the state pension age with earnings of at least £8,105 (in 2012/13 terms) must be enrolled
automatically into a pension plan unless they're already an active member of another qualifying plan.
In addition, any jobholder aged at least 22 and under state pension age who earns between £5,564
(in 2012/13 terms) and £8,105 must be given the chance to join an auto-enrolment plan unless
they're already an active member of another qualifying plan. If they choose to opt in, the company
sponsor also has to contribute on their behalf at the minimum level.
Jobholders outside this age range, in other words aged at least 16 and under 22, or over state
pension age but under 75, must be given the chance to join if they want to, as long as they're
receiving qualifying earnings and are not already an active member of a qualifying plan. If they
choose to opt in, the employer also has to contribute on their behalf at the minimum level. Workers
aged at least 16 and under 75 who earn below the qualifying earnings threshold must be given the
chance to join a registered pension plan (not necessarily a qualifying plan), if they're not already
active in one, but the company does not have to make any contributions.
Employer contributions and the new minimum contribution level
In order to ensure at least a minimum level of retirement income, the government has also
established a total minimum level of pension contributions. The total minimum level of pension
contributions that must be paid into a defined contribution plan is 8% of the jobholder's qualifying
earnings. The employer has to pay at least 3%, and the jobholder has to pay the balance up to the
total 8% (although the jobholder's contribution includes tax relief). For example, if a jobholder
contributes 5%, the jobholder will actually pay 4% with 1% tax relief. There is no minimum
contribution for jobholders who opt out or choose to leave a qualifying plan or for workers who don't
qualify as jobholders.
Automating auto-enrolment
For many companies, auto-enrolment poses a considerable challenge, and not only from increased
costs. Companies need to be able to identify different categories of worker and to tailor
communications on pensions to each specific category. In addition, they need to be able to register
(and analyse) information on opting out and to manage the continuing process of enrolment and re-
enrolment. However, despite or, indeed, because of this administrative challenge, auto-enrolment
2
For more information on NEST, see
http://www.nestpensions.org.uk/schemeweb/NestWeb/public/home/contents/homepage.html.
2 May 2012

3. also provides an ideal opportunity to communicate with employees, to improve awareness, provide
education and to demonstrate support.3
The current economic climate makes employee engagement even more crucial for employers
seeking value for money from their investment in employee pension provision and to attract and
retain staff. By implementing an automated but flexible administration system, companies can not
only meet the new government requirements but they can also increase their employees’
appreciation and understanding of the important benefit that the company is providing.
DC for the future?
Compulsory auto-enrolment and mandatory minimum levels of contribution are powerful drivers for
companies to look again at how they provide pensions to their employees. With DC pensions,
employees are responsible for planning for their own retirement; in addition, the individual
employees bear all pension risks, including the investment risk, interest rate risk, and longevity risk.
It is clear that many individuals do not have the levels of knowledge nor the resources to properly
manage their retirement savings. Here again, with the right systems in place, the company sponsor
can provide assistance to its employees, not only by ensuring that employees have access to
appropriate investments over time but also by monitoring the investment behaviour of employees
and communicating with them where necessary. Not only can this improve the employee’s
appreciation of the benefit (and support) being provided but it should also improve the final outcome,
enabling employees to retire on a larger pension.
Auto-enrolment presents a significant communication and administrative challenge for employers but
it also provides an opportunity to ensure that their pension systems are effective and provide them
and their employees with value for money. With the appropriate tools, companies can take this
chance to engage with their employees, help them with the difficult and sometimes complex task of
saving for retirement and improve the value of pension provision.
AEGON UK
Online auto-enrolment hub
AEGON UK has developed an online auto-enrolment hub to assist corporate clients both to meet
their legal obligations and to improve their pension provision. The auto-enrolment hub is backed up
with effective and engaging employee communications, including a dedicated pension reform
website, designed to improve awareness and offer education to employers and employees.
AEGON’s online hub will offer employers support in identifying different categories of worker based
on payroll information provided, employee communications tailored to their particular category,
collection and feedback of opt-out data, administration system to manage enrolment and future re-
enrolment and full integration with web-based technology to collect and allocate contributions.
AEGON will also help employers by providing employee communications to all categories of workers
and will support employers who also have a plan with NEST.
AEGON’s contract-based group pension products are ready to be used as auto-enrolment plans, for
both new and existing business, from the planned start date of employer staging in October 2012.
3
On the link between organisational support and employee commitment, see Expatriate pensions and employee commitment
(AEGON Global Pensions whitepaper, forthcoming).
3 May 2012

4. smartGovernance for new DC
In order to assist company sponsors to help their employees to save more effectively, AEGON UK
has developed smartGovernance, a powerful range of online governance tools. These tools not only
ensure that the plan is working (contributions are being paid on time, statements are being sent out
and investments are delivering as promised) but also that members receive targeted assistance and
the sponsor receives a complete overview of who is saving what and how. The smartGovernance
toolkit enables targeted communications to be created at plan, advisor or individual level and can
provided a detailed overview of individual member profiles and behaviour.
For more information, please contact Iain Stringer, Regional Director at AEGON Global
Pensions: iain.stringer@aegon.co.uk Tel. +44 (0)7740 897 831
4 May 2012