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• Flexible benefits schemes can automate the transactions required for auto-enrolment, helping employers with large workforces to comply with the changes.
• The framework and structure of flex schemes can help employers communicate the pension changes to staff.
• Flex schemes can ease compliance with the pension reforms because of its administrative and technological capabilities, which can be used to enrol staff into workplace pensions as well as track opt-outs.
• While auto-enrolment relies on inertia, flexible benefits schemes are about employees making choices.
Case study: Universal in tune with changes
Universal Music Group is looking to administer pensions auto-enrolment for employees using its existing flexible benefits scheme. Staff sign up for the company’s flexible benefits, including its pension, via a reward website developed in conjunction with Bluefin.
The music content company also plans to use the online reward system to manage auto-enrolment and adapt its communications strategy accordingly.
Andrea Giacomazzi, compensation and benefits director at Universal Music International, a division of Universal Music Group, says: “Now we feel comfortable that the changes are pretty much set, our first step is obviously
to look at the cost implications of contributing based on the definition of pensionable earnings used in the legislation compared to the definition we currently use.
“We will look to integrate auto-enrolment into our online reward hub and automate as much as possible.”
Other benefits provided by Universal through its flexible benefits scheme include: pension, private medical insurance, health screening, dental, gym discounts and bikes for work.
What employers need to consider when using flex to manage auto-enrolment
• A flexible benefits platform can be adapted quickly for auto-enrolment.
• Existing communication, administration and compliance processes used for flex can be leveraged.
• The annual flex enrolment cycle and three-yearly autoenrolment cycle may be challenging to integrate.
• If not communicated well, linking the two systems could muddy the waters regarding employees’ understanding of the pension reforms.
• Employers must be sure their flex package does not induce employees to opt out of a workplace pension scheme once they have been auto-enrolled.
• Flex can be a good tool for providing the necessary audit trail for employers.
Flexible benefits schemes have the technology to help compliance with the 2012 pension reforms, but there is much for employers to consider, says Laverne Hadaway
Advisers and consultants have mixed views on what impact the 2012 pension reforms, which will introduce auto-enrolment and compulsory employer and employee contributions, are likely to have on flexible benefits schemes. Ultimately, the effect will depend on how the Department for Work and Pensions (DWP) and The Pensions Regulator interpret the rules. Nevertheless, opinions differ on how flex schemes can assist employers in complying with the legislation.
Adrian Boulding, pensions strategy director at Legal and General, says: “Flex and auto-enrolment are uneasy bedfellows. Auto-enrolment must happen without the employee lifting a finger. It is all about inertia, whereas flex is about employees making choices and decisions.”
He adds pensions are a long-term matter for employees, while flex involves fairly short-term choices about how to allocate money.
The reforms, which will begin to come into force from next year, mean employers with existing flex arrangements will need to rethink their schemes. Sean McSweeney, principal consultant at AWD Chase De Vere, believes the DWP and The Pensions Regulator have assumed that most employers have traditional benefits arrangements with standard pension schemes, rather than complex flex arrangements.
Large organisations, particularly those in newer industries such as e-commerce and IT, may never have embraced prescriptive benefits packages, but instead offer a flex cash pot allowing staff total freedom to choose the benefits they want. These are the employers that could end up with significant costs to comply with the new rules.
For example, although an employer may offer a flex allowance of 10% of salary, it cannot offset this against the cost of complying with the reforms because it is not a pure pension contribution. Employees can use their flex allowance for other benefits, such as healthcare cover and life assurance. An employer may tell staff notionally: ‘The pot you have got is worth £3,000 a year (of which £2,000 is an employer pension contribution) and I am going to reduce your pot by £2,000 and, if you join the pension scheme, I will give it back to you as a pension contribution.’ But many employees have been able to take that money as cash or spend it on other benefits, says McSweeney.
In its guidance on the employer duties outlined by the 2012 legislation, The Pensions Regulator states that action taken by an employer to persuade an employee to opt out or cease membership of a pension scheme could be against the law, whether or not the inducement succeeds.
It goes on to say that employers must be confident that, in offering a flexible benefits plan, their sole or main purpose is not to induce employees to opt out of a qualifying pension scheme.
However, Robin Hames, head of technical and marketing at Bluefin, and Jacqueline Otten, director of flexible benefits UK at Towers Watson, argue that fears over what might be considered an inducement to employees to opt out of a pension after being auto-enrolled are overblown. Hames says: “Where an employer is genuinely offering flex across a range of benefits, then, as long as it is not part of some master plan to keep people out of the pension scheme and it does not offer any financial advantage, it will not come under ‘inducement’.”
The inducement rule is to ensure that employees are not encouraged to opt out of a pension simply to save employers money. Hames believes the rule is targeted at the large number of employers that offer no pension scheme at all and those which are reluctant to offer one. But organisations can offer a degree of flexibility around core pensions provision through a flex plan that either meets the statutory minimum requirements or exceeds these.
Although advisers acknowledge the challenges of integrating auto-enrolment with flex, the idea that employers might take pensions out of flex altogether to ensure they comply with the legislation is seen as unlikely. This is because flex offers ready-made advantages. It can actually make compliance with auto-enrolment easier because of its administration and technological capabilities, which can be used to enrol employees into workplace pensions as well as track opt-outs.
Matt Waller, chief executive at Benefex, explains: “Flex can automate all the necessary transactions and enables employers to roll out auto-enrolment on a large scale, ensuring that they remain compliant. It also enables employees to make their decisions online and understand the changes.”
Towers Watson’s Otten adds: “Flex can provide a good mechanism for auto-enrolment and for providing the necessary audit trail for employers.
“It makes the pension plan very visible to employees and it means they are more aware of their choices around contributions.”
Employers that offer flexible benefits schemes will already have the means in place to communicate the pension changes to employees and ensure they are kept educated and informed.
Bluefin’s Hames adds: “More often than not, it is a communications and engagement exercise as much as it is about the benefits themselves. Information can easily be delivered to the employee online. They just want education, information and communication online.
“The building of that whole system within the confines of an existing online system that employees are familiar with, will make it a lot easier for employers to engage their staff.”
David Marlow, development manager at Creative Benefit Solutions, adds: “Auto-enrolment will not necessarily create great value for an employer unless the employees really understand what they are getting.”
Read also Pensions within flexible benefit schemes
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