The gestation period of pension reform – and auto-enrolment in particular – makes that of the African elephant look relatively short.
The idea of universal, company-supported pensions for all has been working its way through the machinery of government since the middle of last decade, but much of the definitive detail and legislation is still not yet in place.
UK employers will have to conform to these regulations from next year, however, which makes the situation a bit tricky to say the least.
So, while HR directors await the final details, what can they do now to best plan for, and meet future legislative requirements? Luckily, there are plenty of pointers from a range of sources, including the pensions regulator, to help with the planning process. And there are five practical steps that employers can take now:
1. Establish your auto-enrolment date
The first thing to do is establish the date that your company will need to fully comply with the auto-enrolment regulations. This is known as your ‘staging date’.
There are a number of factors that influence this staging date, the main one being the number of employees being held under one PAYE reference. The largest employers will be required to automatically enrol their workers into a pension scheme from October 2012, the smallest in September 2016 (see here for more detail).
While the staging date is the last possible one for compliance purposes, it is possible to bring it forward. The logic behind this situation is that some employers may wish the staging date to fit with other business plans such as year-end or pay reviews.
2. Categorise your employees
Once a target date has been established, the next stage is to assess the likely impact of the changes on your organisation.
The first step here is to categories your employees. But a word of caution: it may be necessary to think more broadly than simply permanent staff as agency workers, volunteers and those with verbal contracts also need to be considered.
There are three categories of employees covered by auto-enrolment (please note that all figures are subject to final legislation):
- Eligible Jobholders: All employees aged over 22 and under State Pension Age, who earn more than £7,475 per annum, are eligible to be auto-enrolled into a certified scheme and to benefit from company contributions to their pension.
- Non-Eligible Jobholders: Anyone aged over 16 and under 75, who falls outside of the above criteria but earns more than £5,035 per annum, is eligible for company contributions should they ‘opt-in’ to a certified pension scheme.
- Entitled Workers: In broad terms, anyone who does not fit into either of the above categories is eligible to join a pension scheme (but not necessarily a certified one), but not to benefit from company contributions.
It is also worth pointing out that each of the different categories has their own particular duties attached. Duties common to all three include deducting employee contributions from their salary and keeping suitable records. Action will also need to be taken if employees move from one category to another.
But for the purposes of assessing the financial impact of auto-enrolment, it is the Eligible Jobholders group that will cost you the most.
3. Establish the probable cost impact
Given that the various earnings triggers are still yet to be confirmed, it is only possible to estimate costs at this point. But undertaking such activity is still a useful exercise.
Ultimately, the combined contribution will amount to about 8% of salary, but as the table below shows, there is a phasing-in period for both employer and employee:
Employer Worker Total
Staging date to 30/09/2016 1% 1% 2%
01/10/2016 to 30/09/2017 2% 3% 5%
01/10/2017 – 3% 5% 8%
These contribution levels are based on band earnings, which (broadly-speaking) are all taxable earnings of between £5,035 and £33,540 per annum.
4. Choose a Certified Scheme
The final chunk of planning activity is to choose which scheme(s) you will employ for auto-enrolment purposes. Current legislation does not dictate which scheme must be used, although it does set certain benchmarks. Passing such tests results in schemes becoming ‘certified’. But which scheme to use?
One option is the National Employment Savings Trust’s offering. Although many employers have found NEST confusing, in reality it is just another pension scheme that employers can opt to use. There is nothing wrong with using it.
A key downside, however, is its public perception. Moreover, one of the principal reasons that employers have provided company pensions to date is the return on investment in terms of lower recruitment and retention costs. But it is difficult to see how NEST could generate such a return given that employees will in future essentially get the same deal wherever they work.
Employers can still opt to provide their own pension schemes with added bells and whistles in order to use it as a recruitment and retention tool, however. But whichever route they choose, it is a big decision and one that they would be well advised to consider carefully.
5. Take action
Last, but not least, act on your planning as soon as possible. Early interventions can cut down on cost and administrative burdens. So get weaving.
Steve Herbert is head of benefits strategy at consultancy, Jelf Employee Benefits.
