A rising number of horror stories are emerging from employers and pension providers about how some payroll providers have failed to step up to the mark when it comes to auto-enrolment.
If you read nothing else, read this…
- Processing pay and pension contributions has been an issue.
- Auto-enrolment consultants have seen organisations’ payroll providers over-sell their solutions.
- Payroll providers have struggled to send out legal communications.
- A second wave of purchasing is taking place, with employers switching providers.
The payroll function’s role is vital for the smooth, ongoing delivery of auto-enrolment. It is the function that holds and transfers the crucial data that enables employers to comply with the legislation and ensures that the right employees contribute the right amount to pension schemes at the right time.
If pensions and payroll managers are not able to identify, for example, job holders within the set pay brackets and age brackets laid down in legislation, as well as opted-out staff (and when they have to be re-auto-enrolled), plus a range of other auto-enrolment parameters, they will be left with a headache, and employers will fall foul of The Pensions Regulator.
Payroll providers slow to change
Unfortunately, some payroll providers have been slow to change their systems to cope with the demands of auto-enrolment, which started to affect large employers from October 2012. The tight timescales involved in processing pay and pension contributions have been a particular issue.
Mark Futcher, a partner at Barnett Waddingham, says: “We are seeing a number of problems with payroll providers which have left many organisations having to upgrade, switch providers or buy extra modules because it went wrong.”
Some employers are having to run dual payments because their payroll provider over-sold its auto-enrolment solution. “Payroll providers are now seeing and understanding the importance and emergency of auto-enrolment and have stepped up their game, but it is late coming,” says Futcher.
Compared to pension providers, many payroll providers were slower to get to grips with the auto-enrolment process, possibly because they were focusing on the real-time information (RTI) legislation that had to be complied with from 6 April 2013.
Jamie Jenkins, head of workplace strategy at Standard Life, says: “Pension providers were working on auto-enrolment earlier than their payroll counterparts, but payroll plays an important part, if not an equal role.”
Multiple payrolls throw up greatest challenges
Many employers have several payroll systems in place, and larger organisations could have dozens running at the same time. It is the data that feeds to and from these myriad payrolls that can throw up the greatest challenges.
“This is where the complexities come in,” says Jenkins. “Employers don’t sit there with one payroll, they have several. Quality of data is required for auto-enrolment, it is generally greater than usual, especially with fluctuating pay over periods of time. The different pay periods and payroll cut-offs have also made it more complicated and caused a problem.”
The Employee Benefits/Capita Pensions Research 2013, published in August 2013, found that of the 108 respondents that had auto-enrolled staff, only 43% said HR/payroll systems were able to cope with auto-enrolment rules.This indicates that those yet to comply with auto-enrolment are in for a nasty shock. Because the same research found that 77% of the 236 respondents that had not yet auto-enrolled think their payroll systems will cope with auto-enrolment rules.
Middleware can be the solution
A number of middleware products have been developed to automate the process of auto-enrolment and smooth the path between payroll and pensions administration.
Middleware suppliers say their technology eases the burden of auto-enrolment, but critics say it is too complex and expensive for most auto-enrolment needs.
Sean McSweeney, auto-enrolment specialist at Chase de Vere, says: “This technology can be integral to the payroll system used, or stand-alone middleware from a third party or a pension provider.
”A technology solution can radically reduce and even automate ongoing auto-enrolment compliance. The downside is that middleware can be expensive and even over-engineered at times. Employers need to understand all their options.”
Second wave of purchasing
The payroll market is seeing a second wave of purchasing as some employers change payroll providers because their existing one could not get its system up and running.
Melissa Goddard, director of pension solutions at Ceridian, says: “Organisations need to really think about what solution they are going with because it may not work with their pension provider. We have seen a second wave of purchasing because of these problems. But these should start easing because there is more flexibility in the legislation.
“Employers have been coming to us saying they went down one route and it didn’t work for them.
“The general issue we have seen is that organisations are trying to join up two different functions that have traditionally never had anything to do with each another.”
Lack of legal communications
Now pension providers and payroll providers have to talk to each another and not simply pass over data, as in the past. “Suddenly we are in a position where these two third parties have to talk to each other and communicate effectively,” says Goddard. “Employers are seeing that they have not come together in the right way.”
Employers have also encountered problems with payroll providers where they are unable to send out the necessary legal communications.
Laith Khalaf, head of corporate research at Hargreaves Lansdown, says: “The waiting time for this information runs into months. With the potential auto-enrolment capacity crunch looming, this is a headache employers could do without.
“Pension providers have helped many organisations draft their auto-enrolment communications where their payroll provider has failed to do so.”
With the payroll function playing catch-up on auto-enrolment, it can take a lot of effort by employers to keep it on track.
It is fair to say that the payroll industry was indeed caught on the back foot where Automatic Enrolment readiness has been concerned (and the reasons for that are many and genuine), but it has certainly picked up speed now, but more could always be done to improve. Automatic Enrolment is proving to be a steep learning curve for all stakeholders of which payroll is just one. Advance planning and clear lines of communications are a must along with the recognition that additional resources will be required. For too long the payroll practitioner has been called upon to add to their workload and as an industry we respond with accuracy and vigour on each and every request, or instruction, but good response times come at a cost, how much at present is not yet clear and won’t be for some time to come, but for the employer to fulfil their stringent legal obligations under Automatic Enrolment they need to recognise that increased costs will be needed. Always looking for cheaper and at the last minute won’t guarantee a successful outcome and will inevitably result in the need for constant change of payroll provider.
I am a little confused by this article in a number of places. For example, why would it be for a payroll provider to send out pension communications as the first port of call? Undertaking assessment I can understand.
Why would it be a failure of the payroll to draft pension communications? Especially when the employer has a pension provider and an HR department!
There is an element of irony in the article which appears to place some responsibilities in the wrong place, and often the place that is not receiving the on-going management fees earned for AE!
A major challenge for the first wave employers is that they often insisted on bespoke systems with some limited understanding of all the legal implications and its future change requirements.
Payroll is essential for assessment, postponement, contributions, but don’t place all the duties on the payroll. Pensions needs to earn it money and there may be some investment required for employers to fulfil the duties which do not fit naturally into payroll provision.
But equally, why have pension providers not updated their back end systems to cope with aspects of AE such as refunds, opt-outs and adoption of standard interfaces.
Its a team effort.