- New “auto enrolment” pensions rules come into force from October 2012
- Companies will have to contribute to virtually all their employees’ pensions
- Ten million additional people expected to join pension schemes
- “Critical” that businesses plan ahead and test their systems ahead of the go-live date, warns KPMG
- Switching to a “bundled” approach to pension provision as part of auto enrolment planning can reduce operational costs by up to 60 percent according to KPMG
30 September 2011
With just a year to go before auto enrolment becomes compulsory for large employers, KPMG is warning that businesses that have not already begun to plan for this major change need to take action fast.
And if the looming deadline is not sufficient incentive for companies to review their staff pension provision, perhaps the prospect of more than halving their running costs might spur them into action. KPMG has found that employers who review their entire pension provision in the context of auto enrolment and take advantage of all the savings and efficiencies available can see their costs fall by up to 60 percent.
Auto enrolment: the basics
Auto enrolment will compel employers to make pension contributions for virtually all their employees. It comes into force from October 1st 2012 for companies with 120,000 workers or more. Most medium-sized companies will have to comply from early 2013.
Initially, employers will have to contribute a minimum of 1 percent of the eligible worker’s salary, rising to 3 percent by 2017.
The vast majority of workers will be eligible for auto enrolment, apart from those earning under £7,474 per year, those who do not meet the age criteria, and those who actively opt-out.
Gurmukh Hayre, pensions partner heading up the auto enrolment team at KPMG in the UK, commented: “With only a year until auto enrolment becomes a reality, it is critical that businesses get their plans in place. Most employers, especially the larger ones, do already have some pension provision in place for staff. But it may be that not all staff are scheme members. Under the new rules, almost all employees will need to be enrolled in a company pension scheme. Employers need to consider how to approach this now in terms of what sort of pension provision offers the best value to the business, the best pension terms for the employees and can be delivered in the most cost-effective and efficient way.”
Existing scheme, new scheme, NEST or a combination?
According to KPMG, some businesses may find that the best way to comply with the auto enrolment rules is to simply enrol all employees into their existing pension scheme if they have one. But if they have a large number of employees who are not members of the scheme or if they do not already have pension provision in place, they may need to establish a new scheme.
Businesses looking to offer a new scheme can do so in several ways: they can establish a new scheme, they can use the new National Employment Savings Trust (NEST) or they can use a combined approach.
And when they have made a decision as to what schemes to offer, businesses need to ensure they leave enough time to test their technology and information systems to check that they can cope with the surge in new members, according to KPMG.
Mitigating the cost impact
With auto enrolment expected to result in an additional ten million people joining their company pension schemes and employers making additional contributions on these employees’ behalf, businesses with a significant number of workers not currently in a work based pension scheme face a substantial increase in pension costs, warns KPMG.
This additional cost will not only be in the form of the actual pension contributions, but also increased running costs.. Businesses can mitigate this by taking the opportunity now to ensure they fully integrate their HR, payroll and pensions systems and also reviewing their existing administration delivery methods. If appropriate, they could consider moving to a more integrated “bundled” approach under which scheme administration and investments are managed by a single provider rather than separate ones, thereby reducing operational costs by 60 percent or more in our experience.
Gurmukh Hayre said: “In helping employers determine their auto enrolment strategy, we are finding that employers are fundamentally reviewing how they run their pension schemes in their entirety and seeking out new and different ways of delivering pensions in a more cost-effective manner, thereby reducing the overall cost associated with auto enrolment”
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: firstname.lastname@example.org
KPMG Press Office: 0207 694 8773
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