Auto-enrolment can be a catalyst for positive change if employers get to grips with the requirements in good time.
For many employers, auto-enrolment will mean making radical changes to their pension provision. But by starting the preparation process well in advance oftheir staging date, they can reduce the risks associated with implementing the new obligations.
Once their staging date is known, employers need to start assessing the financial and administrative impact.
Firstly, they must look at administration. Employers will need to continually assess their workforce for eligibility and keep records of each assessment. They will also need to deduct contributions and manage opt-outs. Employers can decide how best to meet these requirements but, depending on their staff turnover rate, this could require appreciable system enhancements. Larger employers will need to decide whether it is more cost-efficient to keep these administrative functions in-house or to outsource them to a third-party provider. If the former, they will need to assess whether existing systems are up to the job.
Secondly, they must consider communication.
Communication requirements
Auto-enrolment changes employers’ communication requirements. Auto-enrolled employees must be sent an enrolment notice that includes guidance on how to opt out. Communication is also required with non-eligible jobholders to describe a voluntary opt-in process.
The final key issue is cost. The cost of contributing for every eligible employee, systems updates, record-keeping and ongoing communications will be considerable, particularly for employers with large workforces.
The next step is to choose a qualifying scheme that reflects the contributions the employer wants to make and its workforce profile. More paternalistic organisations may want to contribute more than the minimum required, but employers should consider the following points.
First, look at employer contributions. What level of pension do they want to provide and what is appropriate? Workforce demographics are also important. Employers may want to offer different provision to different staff.
Employers have the option to enrol any, or all, employees into the national employment savings trust (Nest). This was designed with a particular focus on low-to-median earners, so employers could use Nest as a single solution or as a component of a broader solution.
Where employers have existing schemes, they must consider whether now is the time to make the required changes to accommodate auto-enrolment. They should discuss the issue with their current pensions provider.
New obligations
In summary, employers must ensure they know their staging date, assess whether their existing provision meets the new obligations and consider how autoenrolment will affect their administration requirements. They must know what member communications they are required to issue. What additional support or engagement literature do they want to give their workforce?
Other important decisions include whether the workforce needs to be segmented to receive different pension provisions, as well as whether to use existing plans, introduce new plans, or both.
Auto-enrolment is a huge challenge for UK employers, but it is also potentially a catalyst for positive change. Preparing well in advance will enable employers to reduce risk, make decisions and, ultimately, offer the most appropriate pension arrangements.
Paul Gilbody is head of consultant relations at BlackRock