Getting HR and payroll systems ready for compliance with auto-enrolment requirements is the biggest challenge relating to defined contribution (DC) pensions facing employers, according to research by Mercer.
The research, which analysed the DC pension offerings of more than 300 UK employers, showed that getting employees to understand pensions ranked as the second biggest challenge, followed by managing the cost of auto-enrolment and having to redesign existing pension contributions structures.
Two-thirds of the respondents are thinking of slowly introducing contributions for current non-joiners. Mercer’s survey showed that 69% of participating employers expect to enrol current non-members into existing plans and nearly two-thirds of organisations are looking to change their contribution designs to allow for the increased overall cost.
Paul Macro, UK head of DC in Mercer’s retirement business, said: “Enrolling non-members into existing scheme structures will mean considerable cost increases for most companies and is likely to result in reduced contributions for future joiners, though in some cases we might see reductions for all members. If individual savings also drop then more people will be unable to retire on the pensions they would like in the future.”
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Although the concerns in the above article are not new, they have become more prevalent recently given the increasing pressure associated with the scheme and the administrative burden that will of course go with it.
Under the pensions reform, employers have a legal duty to automatically enrol eligible employees into a qualifying pension scheme. These requirements are to be staged over a four-year period and are dependent on the size of the employer.
In short, employees must be registered under either a qualifying workplace pension scheme or alternative within one month of the employee starting work, and existing employees must be automatically enrolled in the scheme.
Although many would think that the majority of the administration would be done in the initial stages of the reform coming into play, unfortunately this is not going to be the case. The administration is set to continue throughout the pension’s life, as well as various costs associated not only with administration but with contributions as a result of the reforms.
The administrative cost to employers of setting up the pension and the automatic enrolment is dependent on the type of pension the employer has in place to start with. Employers with a qualifying pension scheme in place will have to do less in terms of administration and will therefore have less costs associated with contribution to employees.
It is therefore important for employers to have a system in place to manage the pension reform, ensure that pension administration is completed efficiently and, more importantly, cost effectively – not just in the initial implementation but to manage the ongoing process.
Research among our customers and prospects shows an awareness that the direct-cost impact on the financing of the planned tiered contributions is now of high importance. However, the work and cost impact on the initial administration (not to mention the ongoing requirements and re-enrol invitations) remain less well understood.
The good news is there are fantastic solutions to these challenges and, hence, opportunities. The Chancellor’s planned reduction in corporation tax can also feature.
Earmarking the whole (or partial) savings on any potential tax reduction towards the cost of auto-enrolment may be “pennies from heaven” to financial decision-makers.