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Nelu Abeygunasekera

Thomas Eggar LLP


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Auto-enrolment pensions: An update


One year after automatic enrolment was introduced, the lessons and experiences of organisations that have already auto-enrolled are coming to light. This article looks at some of the more common pitfalls that can occur when introducing an auto-enrolment scheme.

Planning too late:

Auto-enrolment is a complicated process and it can take between six to twelve months to prepare for it. For example, you will need to appoint a project manager and a team of your organisation’s key stakeholders such as HR, payroll and procurement.  This team will then need to identify your total workforce number, including part-time staff, workers on zero-hour contracts and agency workers. It will also need to speak to your providers about their approach to auto-enrolment and scheme design, assess how many of your workers are eligible for auto-enrolment, how many can opt in and receive employer contributions and budget for what the scheme will cost your organisation this year and over the coming years.  

The overwhelming advice for organisations, therefore, is to prepare well in advance and to start thinking about their options, or seek advice, now even though auto-enrolment may be some time away.

Do not assume that your existing pension provider will take on additional members:

It is expected that 22,000 PAYE schemes will enrol between April and July 2014 (compared to only around 650 for the same period in 2013). By then a significant number of pension providers will have secured the larger and medium size employers and may have little or no interest in securing the remaining smaller sized employers.

This is largely because the small amount of pension contributions from small employers may not justify the high administration cost involved in setting up the scheme. In addition, providers do not have the capacity or resources to accept the millions of workers who want to set up accounts. You may therefore find that you are severely limited in your choice of provider, and the administration costs are much higher than expected.  

Failing to assess the capability of your payroll provider:

Your payroll provider will probably be at the heart of auto-enrolment, but do not assume that they will take on responsibility for everything. Whilst they will possess the practical knowledge of how to use your data to assess your workforce, this does not necessarily mean they will be able to analyse that data for auto-enrolment. For example, it is unlikely that they will be able to establish the date that workers become 'eligible' for contributions, calculate those contributions and manage refunds to workers who have opted out.

Not having clear communication plans for staff: 

Employers have a legal duty to explain to all workers between 16 and 75 what auto-enrolment will mean for them. Depending on the complexity of your workforce you may need to prepare different types of communication for different types of job holder, as well as those workers who are already part of your existing scheme. 

Consider preparing additional communications beyond the official communications you are required to provide so that your workers understand how the scheme works, how it will impact them and to get them engaged in thinking about general financial planning. For example, encourage them to take responsibility for what is probably the biggest saving plan of their lives, involve them in getting the best return on their investments and provide general financial education on pensions, mortgages and savings to help them plan for their future.     

Not considering salary sacrifice:

Salary sacrifice works by the employee giving up part of their salary, and it can offer savings to both employees and employers. The amount they give up is paid by their employer into the employee’s pension pot and the employee receives a lower salary. As a result of the employee receiving a lower salary, both the employer and the employee pay less national insurance contributions (NIC). 

Employees can save between 2 – 12% of their NIC under this arrangement and an employer can save as much as 13.8%. The employer can either keep their NIC saving or allocate all or part of it to the employee’s pension pot.

For example, an employee earns £30,000 a year and decides they want to sacrifice £1,000 of their salary. The employee’s new salary will be £29,000 and the potential employer NIC saving on the salary sacrifice will be approximately £138 per annum. On this basis, a company with 500 workers could save approximately £69,000 a year.

It is important to bear in mind that salary sacrifice arrangements are not suitable for everyone because some workers could be disadvantaged, for example those who are entitled to benefits such as Statutory Maternity Pay.

Employers who are considering implementing a salary sacrifice arrangement should first consider how it could work for them, quantify the level of potential savings and identify the employees for whom the arrangement would be suitable. Consulting with the employees and giving them guidance on how it affects their salary and benefits will be key. 

For employees who agree to this change, their terms and conditions will also need to be changed. This does not necessarily mean an employee has to enter into a new contract of employment, but the arrangement and the employee’s consent should be documented. 

Alternatively, employers could operate an automatic salary sacrifice scheme with employees being able to opt-out. In such cases it would be appropriate to give employees sufficient time and information to make their decision. However, employers must also ensure that they do not give the impression that salary sacrifice is compulsory.

Those employers that are expecting high numbers of employees to opt-out of auto-enrolment and are hoping they can avoid the time and expense of the new regime, would do well to note that the reported opt-out rates in the private and public sector are around 9% and are at their lowest among workers below the age of 50.     

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Nelu Abeygunasekera


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