Whether you have a single employee or 5,000, current changes in the law mean that an employer will have to automatically enrol all eligible employees onto a workplace pension scheme, irrespective of whether they have a scheme in place at the moment.
Most larger organisations for whom the deadline is looming already have plans in place to deal with it, but the staggered staging dates mean there is no compulsion for the remaining thousands of small- to medium-sized companies to act swiftly. And as a result, many are ignoring it until they have no choice.
However, as it’s impossible to over-emphasise the time and effort required to get ready for auto-enrolment., Neil Lagden, Head of Bond Payroll Services and Andrew Waller of employee benefits consultants, Generation Financial Services, are urging organisations of all sizes of the necessity to start preparing now, even if their staging dates are not until 2014 or beyond.
Pension auto-enrolment is undeniably one of the biggest developments to impact employers in decades and the first organisations to be affected (as of October this year) will be those with more than 120,000 employees. A five-year staggered implementation programme means that those employing fewer than 30 people have until between January 2016 and April 2017 to comply.
Payroll and pensions professionals meanwhile are mindful of other factors looming large on the horizon which potentially will compound the issue, not least the introduction of Real-Time Information (RTI) on similar or identical timeframe(s) for some firms. Far less talked about but also significant is the introduction of the Retail Distribution Review (RDR) in the Financial Services market from January 2013, which fundamentally changes how employers pay for workplace pensions. There is little doubt that RTI will place a huge amount of strain on payroll and HR departments, while RDR threatens to choke off the supply of independent financial advice at a time when many organisations will be in most need of support and guidance on pension schemes.
There are two key aspects to the challenge facing employers. While auto-enrolment is about pensions, it is also about the introduction of procedural change throughout an organisation. New reporting structures and business processes need to be created to handle all of the associated tasks and decisions have to be taken as to where responsibilities lie. The payroll function will undoubtedly be at the coalface of its implementation but line managers, for instance, need to be aware of the steps involved in processing opt-outs (employees can opt out of the scheme but need to be enrolled first) as well as additional aspects of remaining compliant. Decisions also need to be taken regarding the technological requirements of implementing and automating processes. If payroll or benefits management is outsourced, it is essential to think through how auto-enrolment might alter these arrangements.
The second issue for employers centres on the actual pensions scheme(s) that needs to be set up. Employers must ascertain whether their existing scheme meets the qualifying criteria and/or whether they want to use NEST, a workplace pension scheme set up by the Government to help employers meet the needs of its pension reforms. Organisations need to establish which scheme is the most fitting for their set of circumstances. For instance, a workforce comprising four directors, 10 managers, 30 office staff and two van drivers may require three separate schemes to be in place. Also bear in mind that a group pension scheme may already exist with a major provider, but these companies often look for high premiums from high-salaried personnel and will therefore be less interested in taking on lower paid employees. Meanwhile, if opting for NEST for just some or the entire workforce, there are capping issues of which employers need to be aware.
The scale of both sets of challenges will, of course, depend on the type and size of company, the sector in which it operates, and its available resources. Those most likely to struggle with scheme implementation are those companies with smaller payroll and HR departments or indeed those for whom payroll is only part of their daily duties. Large organisations have their own set of potential problems though. Those operating in sectors with high staff turnover such as retail, hospitality and leisure or logistics will face an even larger administrative burden because of the volumes of joiners or leavers. Additionally, whatever size of company, employers are likely to find themselves with an increased pay bill because of the extra cash contribution they will be making, so it needs to be budgeted for. Staging dates also need to be carefully considered from this point of view: it would be logical to synchronise dates with the annual pay-rise so the company pension contribution can be built-in into the pay rise structure.
The pension reform is governed by hundreds of rules and while the Pensions Regulator has published educational guidance on its website, deciphering it to establish how it applies precisely to an individual organisation’s needs will be difficult. If an organisation doesn’t have the necessary expertise to do so in-house, it is advisable to seek external advice and an employer needs to decide who they will go to for this. Will it be the company accountant, an independent financial advisor (IFA) or a pay and employee benefits consultant? With the bulk of organisations likely to switch to auto-enrolment by April 2014, they need to consult with such specialists early to avoid a logjam in the supply of financial advice available.
According to the Pensions Regulator, two thirds of employers intend to take specialist external auto-enrolment advice with the majority opting to approach accountants or IFAs.
It’s not what you know…
Be aware though that the aforementioned RDR makes new professional demands on IFAs. They will have to upgrade their qualifications and given the average age of an IFA is in the mid-fifties this has led to predictions that many will exit or retire from the industry. A report from CoreData Research UK predicts that almost a tenth of IFAs will leave over the next five years, which some experts suggest is less than expected in the light of the demands of RDR, but unless fresh blood enters the sector, this potentially leaves a knowledge void at a time when employers are most in need of trusted advice on pensions.
The Pensions Regulator intends to write to every employer at least twice to remind them their staging date for auto-enrolment is nearing. But it is inadvisable for employers to be complacent and sit back until then. Many employers seriously underestimate the length of time involved and this lack of preparation, combined with poor implementation, will lead to non-compliance and the risk of heavy penalties imposed by the Regulator.
Our recommended first steps are to conduct an audit of the workforce to determine everyone who is eligible for enrolment. Auto-enrolment is undeniably a major deal for employers but by confronting it early, it is possible to limit the disruption it will bring. Moreover, what is often lost in the discussion over auto-enrolment is that providing a means for employees to save for their future is a tremendous opportunity, particularly in view of increasing life-expectancy, and the value of this may be repaid in terms of loyalty and reduced staff turnover. So act now and it will be in everyone’s long-term interest.