Auto-enrolment marks new era for retirement savings in the UK
22nd April 2013
It has been called many things: taxation by the back door, private sector fight back and compulsory savings, but the one thing automatic enrolment is not, is solely a pension issue.
In what is widely regarded as the biggest shake-up of workplace pensions for 20 years, companies with more than 10,000 staff must automatically enrol all eligible employees into an employer-run pension scheme within the March 2013 'staging date' deadline. By April 2017, even the smallest employers, with less than 30 eligible staff, will have to fulfil their auto-enrolment obligations. From an employee's perspective, auto-enrolment could have a significant impact on their retirement options and employers have an obligation to make individuals aware of their new rights. A key issue for individuals to consider is how much income they will require in the future, as well as the implications of opting out, such as the potential loss of employer contributions and tax breaks. Satisfying all auto-enrolment legislation means significant ongoing compliance and governance obligations for employers. While systems specifically developed for this purpose are available, it has not all been plain sailing. A number of employers have found that some solutions have struggled to deal with the realities of employee choices and the day-to-day pressures of payroll and HR departments. However, the experience of larger employers could offer valuable lessons for Sheffield's SMEs, as they get ready for their own staging dates. To aid employers in the introduction and running of auto-enrolment schemes, the Pensions Regulator has set out nine principal auto-enrolment duties, as part of its guidance for employers: 1. Providing all workers with information about their new pension rights. 2. Automatically enrol eligible jobholders into a qualifying scheme. 3. Put non-eligible jobholders who decide to opt in, into a qualifying scheme. 4. Give employees who are not entitled to be auto-enrolled, the opportunity to join a scheme. 5. Advise all those who have been automatically enrolled, that they have the right to opt out. 6. Refund contributions for those deciding to opt out. 7. Register the qualifying scheme with the Pensions Regulator. 8. Automatically re-enrol those employees who have previously decided to opt out - every three years. 9. Re-register the scheme every three years While a long list in its own right, these duties do not even begin to take into account other aspects of the implementation stage, such as the development of a compliance or governance system. This process is likely to involve a workforce assessment, which will allow the existing and new arrangements and requirements of individual employees' to be established. In parallel, employers will also be looking to establish the financial implications of auto-enrolment. Cost modelling and an impact assessment will form part of this process, in addition to a review of what steps can be taken to mitigate costs. A large number of pension scheme providers have turned their attention to this emerging market and an assessment of the different solutions and options available will form part of this process. Whatever the ultimate strategy, the system implemented must allow the smooth running of the scheme, while ensuring compliance with the nine principal auto-enrolment duties, compliance and governance obligations. So where is the silver lining? It is widely known that about 20 per cent of UK employers offer a pension scheme into which they will contribute for employees. What is less widely known is that only about half of those eligible employees have taken them up on their offer. Intellectual conjecture places this down to a mixture of apathy, on behalf of those who simply do not ask to join, confusion and mistrust on the part of those that do ask, but never take advantage and, of course, affordability. Auto-enrolment seeks to address this by fundamentally changing the choice for employees from -Do I join? to -Should I opt out, now that I am in? A desired outcome of the total legislation is that more employees end up with meaningful pension provision than many of those currently retiring. This result is critical to the well-being of our future pensioners and is to be applauded in its aims. Avoiding the wrath of the Pensions Regulator and eye-watering fines of up to £50,000 will not be easy. Developing a robust implementation strategy, backed by a system and approach that meets regulations and, crucially, communicates effectively with employees, will keep employers legal, while retaining a focus on the core business. Mal Ward is a senior consultant with LEBC Group, an independent pension and employee benefit consultancy. Email: firstname.lastname@example.org Telephone: 01132 32 1112 or 0114 2583917, mobile 07880186346