Key points to consider
• How will responsibility for compliance be split between the pension scheme/provider, the HR department and the payroll department?
• What interfaces are required between these parties and how much can be automated?
• Do systems hold all the data required under the employer’s new duties and is it up to date?
• What will the opt-out rate be and, consequently, what is the additional cost of increased pension coverage and how can this be mitigated?
There are various actions employers can take to offset any increase in employment costs arising from auto-enrolment, say Mark Groom and Richard Slater
Following a long build-up, 2012 finally sees the start of automatic enrolment, which we believe will be one of the most significant changes in UK workplace pension provision for a generation. While much is known about what compliant workplace pension schemes will need to look like, many employers still have a significant programme of change to work through to enable them to meet their new legal duties. In addition, employers are now facing up to the potential increase in employment costs that automatic enrolment will bring and are actively looking for ways to offset this.
In particular, identifying a worker’s eligibility for automatic enrolment and the associated contribution requirements may require changes to HR and payroll systems as well as new business processes to support this. To achieve full compliance, a structured and holistic approach will be required, bringing together the employer’s different business functions to develop a best-fit solution – and all within an agreed budget and an ever-decreasing timescale.
Employers are also now looking at options to partially mitigate the additional costs that automatic enrolment will bring. These may include reducing future pension costs for current pensioned employees and new lower-cost pension arrangements for new employees, as well as salary sacrifice (smart pensions) arrangements for all employee pension contributions.
By changing employee pension contributions to employer contributions, employers should save national insurance contributions (NICs) on staff contributions paid via salary sacrifice. When these reach 5%, salary sacrifice can mitigate up to 23% of the cost of auto-enrolment, subject to prevailing NIC rates and legislation.
Although auto-enrolment and salary sacrifice can operate comfortably side by side, various design and implementation issues should be addressed. Enrolment and opt-out processes for salary sacrifice are different from those required under auto-enrolment, as are the respective earnings thresholds. Care is therefore required so that employees, HR and payroll staff, and pensions administrators understand the parameters, track employee eligibility and process any opt-outs correctly, and generally make sure both auto-enrolment and salary sacrifice requirements are met.
From the employees’ perspective, the government has already started its campaign to raise awareness of automatic enrolment as a new employment right. It will therefore be important for employers to structure their communications to complement this in order to reassure employees that compliance is in hand. This will be particularly important where employers are looking to implement salary sacrifice at the same time in order to avoid any confusion between these two linked, but distinct, changes.
Mark Groom and Richard Slater are partners at Deloitte
• A financial analysis of the full cost of pension contributions is a vital part of preparing for auto-enrolment.
• It is also essential for employers to assess their technology provision to ensure it is capable of coping with all of the requirements of auto-enrolment.
Employers must seek to quantify both the explicit and implicit costs of complying with auto-enrolment and get to grips with the challenges of efficient data management, says Robin Hames
Auto-enrolment presents a range of challenges. Contribution costs, planning for the administration, communicating to employees, maintaining records, getting systems aligned, checking the position for temporary staff and contractors – the list can seem endless and without structured planning and advice, it could all go horribly wrong.
With the issue of staging dates – the last date by which an employer must comply with the new employer duties – now settled following the pensions minister’s statement in January 2012, the time to really get planning is upon us.
Unsurprisingly for many finance departments across the UK, the key issue has been to bottom out and quantify the costs of auto-enrolment.
Given that there are a number of acceptable contribution options using different definitions of pensionable salary, a financial analysis of the explicit costs of contributions is necessarily a vital part of the exercise. Indeed, the team behind our own auto-enrolment financial modeller has seen a significant increase in demand for reports on the range of potential costs of complying with the new regime.
The degree of additional administration required will be driven by some of the decisions arising from this examination of the explicit financial costs of the reforms.
Size, turnover, the degree to which regular pay fluctuates, the balance of full-time staff, part-time, temps and contractors will all be contributory factors in assessing the complexity of administering employer duties. Throw in changes to eligibility criteria and the definition of pensionable salary, and HR departments could be facing some major administrative headaches.
This leads to questions around data management. Relying on a paper-based process does seem optimistic. This is why pension providers and consultants with proprietary technology are investing time and resources to deliver middleware that will interact with HR and payroll systems.
It is natural to assume auto-enrolment lends itself to a payroll provider software upgrade, but this is only the case if we look at the enrolment protocol in isolation.
Much of the administration and communication work is actually pre-payroll – staff need to be categorised and informed based on their eligibility. Other parts, such as administration of the opt-out protocol and handling the subsequent contribution refund, straddle the payment process.
Triggering the correct payment via payroll is only part of the solution. The complete answer will lie in broad-based technology propositions supported by a deep understanding of the legislation and an ability to seamlessly interact with all of an employer’s IT infrastructure.
Auto-enrolment carries implicit as well as explicit costs; planning must include this by asking ‘how?’ as well as ‘how much?’.
Robin Hames is head of technical, marketing and research at Bluefin
Read more from the auto-enrolment showcase