Most businesses by now should be well aware of the new pensions auto-enrolment requirements rapidly heading their way. Starting this October, all eligible employees will have to be auto-enrolled in a qualifying pension scheme. The UK’s largest companies are required to act first, but all will eventually be brought under the compliance net. By 2017, an additional 10 million people will potentially be included in contributory pension schemes.
Employees do have the ability to opt out, but employers do not. The implications are therefore significant on multiple levels. Systems and processes need to rise to the challenge of increased data-handling, which will require integration of HR and payroll systems. Employers should already be ‘mapping and gapping’ their systems to see what enhancements they may need to make.
Businesses also face fundamental cost issues. Compulsory employer contributions could rise if every employee not currently a scheme member chooses to stay enrolled. Some employers may also need to increase their employer contributions for those employees already participating in schemes – if those contributions are below the minimum requirement.
It is important to emphasise the positive. Employers will be doing their bit to help employees plan for their retirement. Steps can be taken to keep employers’ costs down, while ensuring employees’ interests are respected.
Cost-savings are particularly achievable for employers currently using an ‘unbundled’ trust-based scheme, where administration activity and investments are managed by separate third-party providers. Switching to a single provider for both services could generate cross-subsidies and reduce costs, but still maintain a high level of governance.
Alternatives include a contract-based scheme or the National Employment Savings Trust (NEST). The latter has been designed as a low-cost option that offers the advantages of a contract-based arrangement (such as no employer-related administration fee and reduced management time) with what should be a robust trust-based governance structure. However, disadvantages include a cap on contributions and unpopular rules on transferring.
Where increased costs are a concern, potential mitigation opportunities may exist through use of ‘salary sacrifice’ elements. In fact, the auto-enrolment imperative provides a useful opportunity to review pension provision within the wider pay and benefits framework. This needs to work for the business, as well as for employees.
In terms of the pension scheme design itself, every employer should consider how it fits with the broader remuneration strategy. Does one size really fit all? Or is there a need for a multi-tiered approach for different employee segments?
Whatever the individual choices made by employers, plans need to be formed for explaining auto-enrolment to employees. First-time participation in a pension scheme will mean an effective drop in take-home pay. While everyone may agree in theory that saving for old age is a good thing, the real-time impact on current incomes – particularly at the lower end of the salary scale – will not be easy for some employees to accept. The pros and cons of pensions saving need to be clearly explained. And managers at all levels must be involved.
Effective communication is also important because pensions – along with other aspects of pay and benefits – can be important elements of employer branding. Some employers may decide on an approach to auto-enrolment that focuses on doing the minimum required for compliance. Others may decide to accentuate the positive, establishing schemes that protect the interests of themselves as well as their employees. In so doing they could well enhance their reputation both with employees and external stakeholders.