The Pensions Regulators’ April update indicates that 10,817 employers have confirmed they met their duties by the end of March 2014, and of the 15.3 million total workers from these registered employers, an additional 3.2 million eligible jobholders have now been automatically enrolled into a pension scheme.
However, this is just the tip of the iceberg. Further statistics provided by the Pensions Regulator indicate the scale of the challenge ahead. There are around 30,000 medium-sized employers (those with between 50 and 250 staff) reaching their staging date between April 2014 and the end of the year. A further 44,500 are required to comply in 2015, 450,000 in 2016, and an astronomical 850,000 companies in 2017. With such high numbers, many are predicting a genuine risk of advisers and providers running out of capacity.
Many companies with existing pension schemes, even those that may have already staged, may need to review and revisit their schemes now that we have clarity on the level of the charge cap (0.75 per cent) and the timing of its introduction.
The removal of active member discounts (AMDs) and any commissions will now allow companies to review and plan the next steps around their auto-enrolment journey, wherever they are in the process. These changes are clearly good news for many members who should benefit from lower charges. However, it will be interesting to see how the providers of these schemes react, and whether employers will end up with additional costs as a direct result of this decision. On the back of these changes and the Budget announcements, employers will need to seek further advice.
It is important that companies budget and plan for their auto-enrolment journey. A recent study by the Center for Economics and Business Research in 2013 stated that, even for a small business with just one to four employees, the set-up cost to comply with auto-enrolment is likely to be around £8,900, and around £15,600 for employers with 250 people.
These costs may seem high, but when you take into account the work involved, which includes selecting a provider and liaising with all parties involved, altering payroll, and ensuring the administrative and communication processes are in place to ensure compliance, you can see how the costs can quickly add up. Many companies are offering fixed-price solutions with a range of different support and advice options available to meet clients’ differing needs.
Gaps that merit attention by the “second-year stagers” have been identified by the National Employment Savings Trust’s latest report entitled Nest Insight, which has key messages for employers who are due to embark on their auto-enrolment obligations during 2014. There is concern by Nest that the next wave of employers are not allowing sufficient time or detail to manage the process efficiently, and to highlight its concerns, Nest describes the “gaps” as follows:
The experience gap
Nest’s research found that 20 per cent of “first-year stagers” took 16 months to get ready. What is common to these employers is that they all had experience of running a pension scheme, with access to more resources and knowledge than is likely to be available to those staging in 2014.
However, 66 per cent still found that getting ready was more difficult than expected. By contrast, at least a third of “second-year stagers” whose auto-enrolment obligations start in 2014, offer no pension scheme or only a “shell” stakeholder scheme, indicating a potential lack of experience.
The knowledge gap
There is concern that some 2014 “stagers” lack knowledge of pensions and have not “engaged” with the reforms: they find it difficult to “map” a process, because they have insufficient knowledge. Only about 52 per cent of these employers have a good understanding of pensions, compared with 96 per cent of first-year stagers.
The reality gap: Although the report finds that only one in 10 employers say they are intending to comply with their obligations at the last minute, the reality is at odds with this. Only 23 per cent of employers staging between February and July 2014 have designated a provider and met their other obligations.
The Nest research suggests that nine out of 10 employers will expect help to fill any gaps in experience, expectations and knowledge.
Given the recent Budget changes with the need to buy an annuity being removed even for those with modest pension savings, pensions are likely to become more popular than ever. The proposed Budget changes alongside the continued roll-out of auto-enrolment may mean that opt-out rates fall even lower as people appreciate the benefits and flexibility pensions will offer.
Key steps for SMEs
Small and medium-sized enterprises staging from April 2014 need an easy solution to assist in meeting their obligations as prescribed by The Pensions Regulator, both initially and ongoing.
Our own experiences in advising larger clients in the early days of auto-enrolment has pointed to the requirement for a streamlined process that will deliver what SMEs want and need: a simple compliant, process-driven solution that will ensure both they and their employees are able to take advantage of the new legislation.
There are many solutions available, including Nest, and we recommend employers seek advice as quickly as possible and act now to ensure compliance with the rules.
Key steps in preparing are as follows:
* Plan ahead. Given the potential future capacity issues in seeking help, advice and solutions, it makes sense to do it now. We are not aware of anyone who has regretted preparing early. Solutions are available that can be set up in advance and go live in future months or years.
* Know your staging date. The Pensions Regulator will contact you at least 12 months before your staging date, but websites are available that will tell you your staging date immediately.
* Identify who in your business needs to be involved in the process and what external help and support is available or needed.
* Budget for the additional costs in terms of time, advice, and of course the additional pension contribution costs.
* Agree the structure and rules around the qualifying workplace pension, such as contributions, any postponement and earnings definitions. Remember, simplicity is key.
* Choose a suitable pension provider, including reviewing the impact on any existing pension schemes. Do not assume your existing provider will be the best one, or be willing or able to be used automatically for your qualifying workplace pension. Take advice on what options are available and select the right provider with the right options and investments to suit your employees’ needs.
* Check your systems and ensure they are suitable. These include the payroll system, the pension technology, and the software available to assess the workforce to ensure the correct deductions are being made from every employee and the correct communication is issued. How will these interact with each other? Make sure the systems are appropriate and everyone understands the cut-off deadlines and processing dates for each step. Remember, an assessment will be needed at each pay point, so the process needs to be robust – it is not just at staging that it needs to work.
* Sell the benefits. The statutory minimum communications are a must, but you will have invested a lot of time and money into this project, so promote the benefits of what is being offered and how it will help employees.
* Look at the bigger picture and use this opportunity to promote your benefits package. Are you offering the right package for your staff; do they know and appreciate what is on offer; should you provide total reward statements, consider flexible benefits or offer salary exchange?
James Bolton is employee benefits director at Mattioli Woods
Key Points
Auto-enrolment is here to stay and has proved a success.
It is important that companies plan ahead for their auto-enrolment journey.
Gaps that merit attention by the “second-year stagers” have been identified by the National Employment Savings Trust.