Written by Robert Young
Automatic Enrolment began in October 2012 and Government’s view is that to date it has been a great success with low numbers opting out (around 9%). To date it has been the larger employers who have gone through this process, and they have inhouse expertise and resources to deliver such a project. As we move into 2014 and onto 2015 this obligation will fall to a substantial number of SME’s. These employers have far less resources so it remains to be seen how the picture will change.
But Automatic Enrolment is easy isn’t it? In theory the answer to this question is yes. The employer must enrol at least most of their employees into a “qualifying workplace pension arrangement”, deduct the employee’s contribution from their pay, and pass this and the employer contribution over to the pension provider. These funds are then invested and build a fund to provide the employee with an income in their retirement. Simple!
The Pensions Regulator guidance does however run to 234 pages! As an employer have you read and digested all of this material? Do you understand what “qualifying earnings”, “entitled workers” “eligible jobholders” and “non-eligible jobholders” are and how this impacts what needs to be offered? Once these definitions are understood, you need to determine your “pay reference period” for each employee, identify what is payable in that period and compare with the qualifying earnings for automatic enrolment. The amount “payable” is not necessarily the amount that is actually paid! For those who are paid a regular non fluctuating amount this is reasonably straightforward but becomes more complex for those with fluctuating payments. Other issues such as payment of holiday pay or bringing forward payments at Christmas time or other periods of factory shut down all add to the complications.
The Pensions Minister, Steve Webb, has stated that employers should not need help to deal with Automatic Enrolment. At the simplest level this may be true. However, it has been estimated that there are some 33 administrative tasks that need to be completed prior to staging date possibly involving over 100 days of work. Few businesses will find it easy to make available this level of resource as their effort, energy and focus quite correctly is on running their own business. Automatic enrolment also requires continual ongoing assessment of your employees, and unless suitable software is in place this process could take 3 days a month or more to administer. The cost of this needs to be factored into budgeting alongside the requirement for employer contributions.
In theory for those with reasonable spreadsheet skills, the processes can be dealt with using several templates taking data from payroll providers and sorting this to produce the data required for Automatic Enrolment. However not only must all this work be done, sufficient audit records must be held to demonstrate that it has been done correctly to the Pensions Regulator should they ask. Software to automate this process is available, but at a cost. The software providers are finding ways to provide support on a basis that is affordable to the smaller employers. Engaging with professional advisers who can provide intelligent “middleware” system solutions at an affordable price will greatly reduce the burden of administration and help demonstrate compliance. The word “automatic” is important. Only with automation can the time involved both initially and ongoing be kept to a minimum. With the right system the whole process from end to end can be managed efficiently and effectively, ensuring that full records are maintained to keep the Pensions Regulator happy and any potential fines at bay.
The Pensions Regulator suggests a planning time of 12 to 18 months. There are heavy fines for non compliance starting at a fixed penalty of £400 but then rising to daily penalties of up to £500 a day for companies with 5 to 49 employees and £2,500 a day for companies with 50 to 249 employees and rising further for larger employers.
Help is at hand from employee benefit consultants and financial advisers and for some parts of the exercise from accountants, solicitors, payroll providers and pension providers. However with the increasing number of companies reaching their staging dates (30,000 between May and July 2014, 36,000 between June and October 2015 and over 50,000 in some months in 2016) resources will become stretched.
The selection of the appropriate qualifying workplace pension arrangement is important but only a small part. For the project to be successful finance, human resources, payroll and senior management must all work together. There is a real project management aspect to ensure that the right people are available to make decisions at the right time.
Internal communications to staff is a key part of this exercise. The way in which the communication process is handled can make this process a human resources triumph or complete failure. The same approach will not be appropriate for all groups of employees so you will need to consider the most appropriate communication medium for your employees. Experienced employee benefits consultants will be able to assist. All of this is likely to also impact on your terms and conditions of employment and potentially require amendments to staff contracts and employee handbooks.
As an employer, particularly if you do not have any form of existing pension arrangement, automatic enrolment may represent an additional and possibly unwelcomed financial outlay but it cannot be avoided. You therefore need to gain something from this and good communication materials can play a big part. It is important that your employees understand the value of their new pension arrangement. It may be an opportunity to also consider other employee benefits such as group risk arrangements as such cover against death can be provided at far less cost on a group basis then employees seeking this individually. This would be another cost but could be repaid many times over if well appreciated by staff. The use of good systems can then lead onto offering other benefits and providing total reward statements so that employees understand the full value of their employment package.
In summary, automatic enrolment will not go away. Use the tool on the Pensions Regulator website to find out your staging date and begin planning. Seek suitable professional help as this will save you significant amounts of time and overall should save you money. Given the number of employers who will be approaching their staging dates over the next 18 months, now is the time to engage with advisers and secure their support.
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I joined Gordon Dadds in 2013 from Culver Employee Benefit Consultants Limited. I have many years of experience as a consulting actuary, providing advice on employee benefits and acting as a trustee of pension and life insurance arrangements. Outside of work I enjoy choral singing, cycling (I am a member of Tandem Club) and cooking.