If you read nothing else, read this…
- The first organisations to reach their staging date for auto-enrolment have had to make both expected and unexpected changes to their systems.
- Planning for auto-enrolment should begin well in advance to allow time to tackle any issues that may arise.
- Communicating with staff about changes is an important part of any strategy.
After years in the pipeline, pensions auto-enrolment is finally upon us. The first employers, those with more than 120,000 staff, went live on 1 October. The lessons they will have learned from the planning and implementation process could prove invaluable for smaller organisations currently planning for staging dates in early 2013 and beyond. Here, Employee Benefits has collected the experiences and tips of top reward and benefits professionals on auto-enrolment in order to help employers plan their strategy.
Auto-enrolment was first proposed by the Pensions Commission, set up in 2002 by the Labour government in response to concerns that people were not saving enough for their retirement. The commission issued a report in 2006 that recommended the automatic enrolment of employees into occupational pension schemes. Based on this report, the Pensions Act 2008 established a duty on employers to automatically enrol jobholders into, and to contribute to, a qualifying workplace pension scheme. All existing employers must have auto-enrolled their staff by April 2017, although the new rules are being phased in gradually according to organisation size.
Workers aged at least 22 and below the state pension age and earning more than £8,105 a year qualify for auto-enrolment.
Average life expectancy in the UK now stands at 78 for a man and 82 for a woman, according to the Office for National Statistics report Life expectancy at birth and at age 65 by local areas in the UK, 2004-06 to 2008-10, published in October 2011, so it is vital for people to save adequate funds for retirement. This was underlined by LV=’s State of retirement report, published in May 2012, which shows the current state pension equates to an annual income of £5,587 and averages £9,672 when additional benefits, such as pension credit, are taken into account. This total is about half the minimum wage of a full-time worker.
Pensions to rise
The Department for Work and Pensions’ Workplace pension reforms: baseline evaluation report, published in July 2012, suggests that with auto-enrolment, the median private pension income for people starting work now could rise to between £153 and £195 a week by 2070, whereas without reform it is likely to be between £86 and £106. Many employers have planned ahead for auto-enrolment. Employee Benefits/Premier pensions and workplace savings research, published in July 2012, found three-quarters of respondents had calculated the cost of auto-enrolment compliance, and 72% had a project plan in place.
But there still seems to be some uncertainty among employers. The Chartered Institute of Payroll Professionals’ CIPP research paper to understand business readiness for automatic enrolment, published in July 2012, found that 33% of respondents were still not aware of the legislation, with employers in the accountancy industry showing the least awareness.
The CIPP is also seeking clarification from The Pensions Regulator about how backdated pay following a pay rise will affect pension contributions under auto-enrolment. For example, if an employee receives a pay rise that is backdated to the previous April and, on reassessment of their earnings, they now qualify to be auto-enrolled, when does the period for opting out of the scheme begin for this employee? And will the employer have to take backdated employee contributions from them for the months since April?
Thomas Humphris, head office HR and UK reward director at Informa, says: “The amount of ambiguity and differences of opinion on how the legislation was being interpreted earlier this year was the biggest surprise in this entire process. This level of uncertainty has caused delays in locking down the rules-based engines required for both HR [information systems] and employee benefits platforms.”
LEGAL ISSUES
Sarah Ozanne, partner (employment) at CMS Cameron McKenna, says: “New employee protections have come into place that apply to all employers, regardless of their staging date. It is not clear that employers are generally engaged on this issue.
“The auto-enrolment regulations are complex and do not fi t well with other pension regulations. Some amendments have now been made to align existing regulations with duties such as the disclosure regulations [which govern when a pension scheme must provide certain information to members]. However, there is still a general disconnect, which makes advising [organisations] more challenging.”
Catherine Wilson, partner at Thomas Eggar, says: “Under the new rules, employers will need to keep additional records for compliance purposes. These can be either electronic or paper-based, but they must be legible and easily reproduced. Additional information may be needed, such as dates of birth for casual workers, and some data-cleansing may also be required.
“Employers should review current terms and conditions, and related pensions documentation as current information is likely to be out of date.
“Certain staff may require special handling and employers should audit current pension membership records to identify specific cases, such as staff who already have personalised arrangements for tax or other historic reasons [to be handled differently], to avoid potential costly disputes.”
PAYROLL ISSUES
Many employers have needed to make changes to their payroll systems and to consider whether their payroll provider can offer what is needed to comply with auto-enrolment regulations.
David Woodward, chief product and innovation officer at Ceridian, says: “One of our customers has been diligent in its evaluation of the options, thorough in its planning activity and engaged the right professionals at the right time. The net effect of this is a fully integrated pension and payroll solution.
“Spending too long trying to find ways to make low-cost or free solutions work diverts employers’ attention and affects their ability to implement the necessary changes in time. Another example of poor auto-enrolment activity is choosing a middleware solution that requires complex interfaces with the payroll system and results in interruption of the payroll cycle, leading to additional processing time that is high risk in very tight payroll schedules.”
Martin Freeman, director at JLT Group, says: “Employers should be proactive and get on the front foot rather than waiting around for press releases from their payroll provider on what it will be offering. Go to the provider and say: ‘This is what I am going to need, this is how I want to operate: can you help?’ Get it to react to you. Go with a plan in hand because if you just go to it with a blank piece of paper, you may end up with a solution that is not suited to your business.”
TAX ISSUES
Robert O’Hare, tax expert at Lexis PSL, says: “It does not appear that auto-enrolment will have any direct tax impact, but there could be an indirect tax impact on employees. For example, the threshold for the maximum amount of annual pension contributions that qualify for tax relief was recently cut to £50,000. If an employee’s annual pension savings already come close to that threshold, then additional contributions made to the company scheme in which that employee is auto-enrolled may not qualify for tax relief. “There is also a threshold for the maximum lifetime pension savings that qualify for tax relief, which has been cut to £1.5 million. Employees with pension savings exceeding that threshold were able, at relevant times, to register in advance for protection from thetax impact on the excess. Those employees may lose that protection if they do not opt out of auto-enrolment. Employers should draw this to their attention, but they must do so in a way that does not induce them to opt out of the company scheme.”
EXPECT THE UNEXPECTED
Some employers preparing for auto-enrolment came across unexpected situations, as the following examples show:
Jamie Jenkins, head of workplace strategy at Standard Life, says: “Some employers found elements of their workforce they were largely unaware of: not people they didn’t know existed, but those that were on a different part of the payroll system somewhere and no one had a complete record because of acquisitions, for example. This meant parts of the company might act quite autonomously.”
Jim Cowan, head of benefits at Royal Bank of Scotland (RBS), came across an issue with part-time staff. RBS decided to auto-enrol all staff, even those below the required salary level in July. Some of these workers then opted out of the scheme. But, over the summer, some part-time workers were required to work extra hours, which boosted their pay for the month, triggering their eligibility for auto-enrolment back into the company pension scheme. “It took the team working on this a bit by surprise in terms of the sheer complexity of the need to configure pay systems to pick up all those trigger events,” says Cowan.
Alan Millward, corporate benefits director at Jelf Employee Benefits, says: “One [organisation] was proposing to make all staff self-employed or reduce salaries to a minimum level and pay the rest in variable earnings. Another client thought that getting staff to opt out would be a good route to follow and, on understanding that [the company] could not do this, suggested that he could ask his brother, who didn’t work for the company, to have a quiet word with staff instead.”
PLAN AHEAD
Jamie Jenkins, head of workplace strategy at Standard Life, says: “Start from your staging date and work back, rather than think what you need to do next for your staging date. This is an important first step that gives you a sense of the time you are going to need to do this in.”
Spencer Roach, compensation and benefits manager international at Nuance Communications, says: “We are due to stage in 2014 and have been doing a lot of the groundwork now. My view is that we need to start seriously around 12 months in advance to make this work.”
Ruth Greenwood, human capital and pensions manager at PricewaterhouseCoopers, says: “Because we started this process very early, we have minimised the costs. The early start enabled us to incorporate our requirements into our regular system planning cycles.”
David Woodward, chief product and innovation officer at Ceridian, says: “Start early, at least nine months before the staging date. Treat the implementation of pension reforms as a project requiring planning, budgeting, resourcing and governance. Book [suppliers] early to ensure they have the right resources.”
LESSONS LEARNED
James Patten, pension consultant at Aon Hewitt, says: “Communications are key. Employers are likely to want to warm up employees to auto-enrolment, possibly through roadshows or warm-up communications, before issuing compliant ‘boiler plate’ materials to avoid the need for regular subsequent communications.”
Ruth Greenwood, human capital and pensions manager at PWC, says: “Spend time and energy on planning clear, targeted communications. We developed a clear decision tree of the things each category of employee needs to think through and mailed it to their home address. We then emailed their work address with a link to an in-house auto-enrolment website.”
Martin Palmer, head of corporate benefits marketing at Friends Life, says: “Start understanding the employee base as early as possible and bring together the HR and payroll departments to work collaboratively to ensure that all required data is up to date, compatible and to agree the logistics for handling analysis on a monthly basis.”
Ian Barrett, deputy pensions manager at Santander, says: “Systems issues need to be thought through very carefully. With a significant increase in scheme membership, we took the view that self-service was the way to go [for all defined contribution (DC) decisions and elections].”
NEW OPPORTUNITIES
As some organisations have worked to comply with auto-enrolment, they have realised this is an ideal chance to make changes in other areas.
Jamie Jenkins of Standard Life says: “As [employers] started to think about auto-enrolment, they came across things that suggested they should be reviewing their whole benefits package.”
JLT’s Mark Pemberthy says: “Morrisons used auto-enrolment as a catalyst to review its pension strategy and improve retirement outcomes. It developed an innovative cash-balance arrangement to protect employees from investment risk.”
