Auto-enrolment - what your business needs to know 

Speaker Key

RT       Richard Threlfall

AS       Andy Seed

AP       Andrew Pearson

JH        James Hewitt

AR       Anne-Marie Robinson

RT       KPMG Strapline is cutting through complexity.  And what topic better to bring a dose of simplicity to than pensions.  The presentations that follow, from colleagues here at KPMG, are about pension auto-enrolment.  So what is pensions auto-enrolment?  This is the obligation on businesses, whatever their size, to set up processes whereby employees in that firm need to be automatically enrolled on a pension scheme, albeit they may then have an option to opt out.

And the presentations that follow show how this is likely to affect, in particular, the UK construction industry.  But this is a difficult time in the UK construction market, we all know that.  Margins are being squeezed and pipelines are falling.  The last thing any of us can afford is to waste money implementing these obligations. 

But help is at hand.  As you will see, from the presentations that follow, KPMG has a wealth of experience in this space, but above all, we have the knack of making it simple.  This needn’t be complicated, and as you will see, it should be, with our help, quite straight forward to put in place what needs to be done. 

AS       Some of the key challenges we believe that businesses are facing in the UK in successfully implementing auto-enrolment are around the fact that this is not just a pensions problem.  In essence, pensions is the driver, because we have seven to 11 million non-UK pension savers at the moment, and the policy intend, clearly, to reduce the burden, long term, on the basic state pension.  And therefore, from a pensions perspective, the policy intent is to encourage more pension savings, but the reality of implementation for most businesses is more around systems challenges, HR processes, employee communications, and making sure that the right vehicle is able to be accessed by the right level of employee engagement, and the right type of member, to make sure that businesses embrace that policy intent and get people saving into UK pension schemes. 

The key cost pressures for businesses in auto-enrolment, some of which are obvious, some of which aren’t.  The obvious pressures are around the increased payroll cost to the actual physical contributions that employers are going to have to pay.  I think what we’re finding is that less obvious to businesses are the implicit costs associated with auto-enrolment legal compliance, because from a strategic perspective, there are multi-disciplinary aspects to ensuring that every works end to end, and that can include HR policy, HR processes, systems, payroll, employee communications etc, making sure that the right amount of energy, time and attention is given to make sure that those things work in a cohesive way and in a way which will ensure legal compliance.  We’re finding businesses are struggling with those issues.

In our experience, most definitely employers are using auto-enrolment to effect other changes that have been unable to be worked through up to now.  So for example, some businesses are hard closing their defined benefit pension arrangements, where a soft close has already occurred, and using this as an opportunity to effectively blame the government for no longer being able to afford to continue to sustain the defined benefit arrangement. 

Other businesses, where they’ve perhaps organically grown very, very quickly are finding that, on an individual basis, there are a set level of contracts, or terms and conditions inconsistencies which they can use to now harmonise and effectively bring everything together to make sure that it works.  So both from a benefit provision perspective, but also from a systems perspective, we’re definitely seeing the businesses are embracing the opportunity that auto-enrolment presents to make sure that everything works the way it should do. 

AP       Pensions is already a confusing subject.  Most people in the UK don’t understand pensions, and that doesn’t matter whether they’re in a pension scheme or not.  Auto-enrolment’s actually going to make this even more confusing.  For the first time ever, every employer across the UK is going to have to communicate with their employees about pensions, so they really to think about how they do it to make sure they extract maximum value, and their employees really appreciate the value of the benefits they’re being provided with.

Companies do need to comply, but in my view, they need to do far, far more.  If they really want their employees to value these benefits they’re being provided with, some of them for the first time, and they’ll want their employees to make informed decisions about their retirement, compliance really is just the starting step, and it’s a building block from which they need to do far, far more.

Employers need to recognise that their employees like to receive information in lots of different ways.  Some people like it in writing, in the post, some people like to go on-line, and some people prefer face to face meetings.  So employers, if they’re creating a comprehensive communication strategy really need to understand and profile their workforce and make sure they tailor their communication strategy for all of their employees.  Employers really need to be able to keep their communications simple and free of jargon.  Employees are going to understand their benefit and really appreciate the value of their benefits if they receive things that are simple, visually interesting, in plain English, and to a certain extent, in the language that they usually receive information.

Employers really need to start thinking about how they’re going to, you know, on pensions, in relation to auto-enrolment, they really need to start now.  We’re already working with a large number of clients profiling their workforce, understanding how their employees like to receive information, and actually putting together communication strategies that are right for them, and so they can extract maximum value from this exercise. 

JH        What’s quickly become clear to me is that whatever your current pension policy or approach, it will need to change due to the auto-enrolment legislation.  Systems, and more specifically, the automation of processes, will be key to ensure that you’re able to comply with the new duties, both from your staging date and on an ongoing basis. 

The main considerations are what system or systems will you be using your auto-enrolment process.  Your payroll will be a really important system, but it won’t be able to cover all aspects of the auto-enrolment process.  Will you be using a postponement period?  A postponement period can help ensure that certain workers are not enrolled due to pay spikes.  It can also help maximise the period of time that you have to allow an individual to actually opt out of the pension scheme before a contribution is taken from their pay.

Don’t just focus on what you’re doing from your staging date.  This could actually be the simplest aspect.  It will actually be your ongoing processes that will require the most amount of testing.  Remember, auto-enrolment is for life, it’s not just for staging.

AR       October 2012 marks the first staging date for pensions auto-enrolment, so employers will see their costs increase as they reach their staging date, however there are a number of other legislative changes that will coincide, so clients also need to plan for and manage their costs around these.  For example, October 2012 marks the end of the longstanding exemption in relation to holiday pay, so from an employees and employers’ perspective, national insurance costs will increase, and consideration also needs to be given to the benefits that are also usually provided as part of these arrangements. 

In addition, clients will also be required to move over the real time information reporting, from October 2013 at the latest, so there’ll be increased costs from not only a pensions and national insurance point of view, but also consideration will need to be given to those systems and procedures that will be required to support the changes around auto-enrolment and real time information. 

Yes, in these economically challenging times, clients can look at whether systems and processes are fit for purposes, and also ensuring that remuneration has been provided in the most efficient manner.  Salary sacrifice is a very popular idea at the moment, especially in the case of pensions.  By making a scheme partly non-contributory, savings for national insurance from an employees’ and employers’ perspective can be achieved, so it’s a very efficient way of providing a pension.

Other ideas on the cost agenda that clients are considering is also looking at efficiencies around cars, fuel, introducing subsistence allowances, and also third party labour arrangements.  There are a number of ways that clients can make efficiencies around costs.

Yes, it’s a long standing principle, and in the case of pensions, it clearly makes sense.  Clients just need to be careful around how they introduce arrangements.  As always, the devil is in the detail, so they just need to watch out for some of those common pitfalls that can come into place when you’re using salary sacrifice arrangements.  We’re working with a number of clients at the moment to ensure that they can introduce robust arrangements to address these points.

There are a number of important points that need to be considered, and these include ensuring that the irrevocable nature of the scheme isn’t compromised.  Also ensuring that national minimum wage isn’t impinged, and issues around refunds are addressed.  There are a number of areas that clients should focus on, but ensuring that there is effective communication with employees is absolutely vital to allow the employees to make an informed decision.