Part of the Process

Despite the understanding that encouraging more Britons to save for their retirement is an essentially laudable ambition, it’s fair to say that few companies are particularly excited about the coming shift to auto-enrolment.  Times are tough, with the economic climate seemingly worsening by the day. Small businesses in particular are facing one of the most difficult times in living memory, which makes it particularly unwelcome that they are set to be hit hardest by the coming reforms. The Federation of Small Businesses chairman Mike Cherry effectively summed up the thoughts of many employers when he said that: "It is vital that everyone is able to save for their future, but the automatic enrolment scheme is going to cost the smallest businesses dear. The true administrative costs are unknown and could be extortionate."
 
A glimmer of hope for beleaguered businesses emerged in October. Government adviser Adrian Beecroft’s report into possible ways to cut red tape included the suggestion that auto-enrolment could be delayed in order to make life easier for organisations currently struggling to keep their heads above water. However, this potential lifeline was quickly cut by pensions minister Steve Webb, who reiterated the coalition’s commitment to the current timetable. “We need to get on with this now and not to meddle – we need a stable architecture,” he said. “People will react in different ways and we will learn as we go along.”
 
While this may not be what employers want to hear, it means that they must now look seriously at how they are going implement the systems and processes that auto-enrolment will demand. The reality of the situation is that being prepared for its staging date is only a small part of a massive and ongoing challenge that every UK company will have to face in the very near future.
 
A question of knowledge
 
A key issue is quite simply that a large proportion of employers currently have no pensions provision and consequently lack the experience to effectively plan and administer one. According to the Department of Work and Pensions, employers with zero pension provision make up 86 percent of the UK total and employ 40 percent of the workforce. Unsurprisingly, most of the companies that fall into this category are micro and small employers and, as such, are least well positioned to cope with the growing administrative and cost burdens that auto-enrolment will entail.
 
In its report ‘Making automatic enrolment work’, the DWP admits that it is these small employers who will be most significantly affected by the coming reforms. The document states that: “Given the predominance of small and micro employers, this group also has the highest rates of employee churn, between 14 and 17 per cent, and will have to undertake proportionally more automatic enrolment activities per year than other groups of employers. Most will also be making contributions for the first time and thus face the highest proportional costs of all employers.”
 
The issue of workforce segmentation is one of the thorniest raised by the coming reforms. Determining which employees are eligible has the potential to be an administrative minefield for employers. For example, some workers will not be covered by the auto-enrolment rules due to their age, working hours or salary. However, some of these ineligible employees may take up the offer of voluntary membership of the qualifying scheme and thus become eligible for auto enrolment. In this case they will fill out an opt-in form which employers must correctly respond to if they wish to remain compliant.
 
In other cases, workers not eligible for auto-enrolment into the qualifying scheme could be able to join an alternative workplace pension scheme, which the employer must operate either as a separate scheme or as part of the qualifying scheme. While the employer will not be obligated to make contributions to these workers’ pensions, they must still facilitate their operation by deducting contributions from salaries and passing them on to the relevant pension provider.
 
Additionally, employers must continually monitor the situation of those non-eligible workers who are part of an alternative non-qualifying scheme. Companies will need to be aware of their circumstances in case changes in age or salary render them eligible for auto-enrolment.
 
Even those employees who opt out of any pension scheme bring their own challenges. It falls to employers to ensure that re-enrolment dates are set and observed, in order that they can remain compliant with the new rules.
 
What all this makes abundantly clear is that auto-enrolment will require considerable ongoing effort on the part of employers, all of which will come with a cost. Leaving aside an organisation’s responsibility to contribute to its employees’ pension funds, simply administering the systems will present significant financial implications.
 
Footing the bill
 
The Department of Work and Pensions have attempted to quantify the per-employee administrative cost of the new rules, but it remains to be seen how accurate these predictions will be. There are a huge number of potential variables in how compliance processes operate and it is likely that a true picture will only emerge once they are actually in operation. As has already been demonstrated, there is considerable complexity involved in establishing and maintaining these systems, so it is not beyond the realms of possibility that mistakes could be made. This is a particular risk for smaller companies who have little or no experience in administering these kinds of programmes. Correcting any mistakes could prove costly. In addition, compliance failures could draw regulatory penalties in the form of as yet unspecified fines. Taken as a whole, these factors add up to largely unquantifiable additional expenses for firms that are not adequately prepared for the coming changes.
 
As an indication of what impact the new regime could have, it is instructive to look to the example of Norway. During 2006-2007, the country underwent its own transition to mandatory pensions, Obligatorisk TjenestePensjon in the local lingo, and the difficulties experienced by many employers there are likely to be repeated here in the UK. Consultants Mercer were involved in Norway’s transition and witnessed many of the difficulties first hand.
 
“It’s tempting for most companies to leave all the preparation work till the last minute, but Norway’s experience of doing so was certainly painful – for employers and providers,” said Richard Tuff, the company’s auto-enrolment manager.
 
“One of the unintended consequences of Norway’s legislation was the extreme complexity of the auto-enrolment requirements, and the UK’s regulations will have a similar effect. The main administrative challenge will be to categorise and track employees on a continuous basis, to ‘catch’ them when they became eligible for auto-enrolment. Many employers believe auto-enrolment is a one-off exercise, but it’s much more complex than that.”
 
Recent events such as London’s Employee Benefits Live have given employers and pension providers the opportunity to discuss how they will respond to the advent of auto-enrolment. What has emerged from these discussions is that, while many employers are clearly grasping the nettle and ensuring they have systems in place ready for their respective staging dates, few – if any – have considered how they are going to segment their workforce into the three categories of eligible, non-eligible and entitled.
 
Even particularly proactive employers who have already begun the process of auto-enrolling their employees seem to have overlooked the subsequent and ongoing necessity to rebalance their assessments as the make-up of their workforce evolves. Salaries and ages will change and employees who initially chose to opt out will need to be re-enrolled. Keeping track of these constantly shifting data points will be essential if systems are to function properly. In addition this information must be recorded and held for as long as six years under the new system. Failure to be able to produce this data at the request of The Pensions Regulator could have serious legal consequences.
 
Perhaps this failure to engage with what happens after the auto-enrolment legislation is activated can be attributed to an excessive focus on simply hitting initial deadlines? Maybe it’s because many companies believe that a staging date a few years into the future gives them plenty of time to get their houses in order? Whatever the reason, organisations would do well to start thinking about how they are going to administer these programmes sooner rather than later. Even if a company’s staging date doesn’t fall until 2014, three years isn’t a very long time in business. Given the inevitable cost impact of the reforms, long-term plans need to take these extra responsibilities into account if companies aren’t to see already slim margins being eroded further.
 
For larger companies with well-developed human resource and accountancy structures, the potential problems will be less disruptive. But for small and medium-sized businesses, it is imperative to seek advice right away on how best to transition to this new reality without paying too heavy a price.
 

Auto-enrolment: The Big Numbers
 
£17.1 billion: Estimated total additional pension contributions over implementation period.
 
£77 million: Administration costs for the 8000 employers with more than 250 staff in first year.
 
£123 million: Administration costs for the 576,000 employers with between two and four employees in first year.
 
£11 million: Ongoing administration cost for companies with more than 250 staff.
 
£47 million: Ongoing administration costs for companies employing between two and four people.
 
£16 million: Ongoing administration costs for businesses with just one employee.

 
Who is eligible?
 
Employers will need to monitor the earnings of workers earning below the income tax threshold over a rolling 12-month period. A spike in earnings may result in a jobholder needing to be auto-enrolled. This may happen if the jobholder is paid a bonus or overtime.
 
Eligible jobholders who are not already enrolled in a pension scheme which meets the minimum requirements will need to be automatically enrolled in such a scheme within one month of becoming eligible. Once enrolled, employers must continue to contribute for as long as the worker earns, even if their earnings dip below the income tax threshold.
 
Jobholders under-22 or over the state pension age who pay tax, and those who earn between £5715 and the income tax threshold, can choose to join the scheme even though they are not eligible for auto-enrolment. The employer will need to make contributions for those workers.
 
Jobholders earning less than £5715 can apply to join a registered pension scheme chosen by the employer. The scheme does not need to meet any criteria and the employer will not need to contribute. Employers should be ready to deal with these applications.
 
Source: www.out-law.com