The pros and cons of using multiple pension plans for auto-enrolment

Employers must ensure that their pensions schemes comply with auto-enrolment rules, which may lead some organisations to run multiple schemes for the workforce.

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  • Using multiple pension schemes will not suit all employers.
  • Running multiple schemes can be confusing and may increase communication costs.
  • Communication strategies must clearly differentiate the benefits of each scheme.

The Pensions Regulator (TPR) requires all workplace pension schemes to meet its qualifying criteria for auto-enrolment. A qualifying scheme may be an occupational or personal pension scheme that is tax registered and satisfies certain minimum requirements, which differ according to scheme type.

But employers with an established scheme that is deemed as qualifying and those without a qualifying scheme have both faced challenges in meeting the rules. This is because not all pension providers are willing to accept low-earning and transient employees, who are likely to prove costly to administer.

Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: “The problem with auto-enrolment from a [pension provider’s] point of view is that it is concentrating on shorter periods of employment and, typically, smaller salaries. That demographic is not, in other words, ideal [for pension providers].

“If the provider gets flooded with people it does not want, it reserves the right to change the terms of its existing scheme. So some employers feel that using their existing scheme for auto-enrolment would have a negative impact on those coming into the scheme and those already involved.”

Second provider

Some employers have overcome this problem by appointing a second pension provider, such as the National Employment Savings Trust (Nest), to run alongside their legacy pension scheme.

Malcolm McLean, a consultant at Barnett Waddingham, says: “There is a definitive move toward multiple pension schemes during auto-enrolment, but the problem is that they offer less flexibility because the employer has to contribute to more than one scheme and has higher administration costs. However, the motivation is to save money overall.”

One danger in running multiple pension schemes is the potential to make an already complex issue even more confusing. For example, employers may also have to manage multiple communication strategies.

Communication strategy

McLean adds: “Auto-enrolment is critical in terms of staff having a choice to stay with a pension scheme or not, so an employer’s communication strategy has to be strong.”

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Matt Frost, a director at Shilling Communication, says: “Employers offering more than one option need to be sure there is a clear distinction between the schemes so staff understand the benefits they will receive from the scheme they are being enrolled into.”

But ultimately, multiple scheme management requires working with the right third parties to ensure plans remain compliant with the reforms, says Morten Nilsson, chief executive officer at Now: Pensions.