Automatic enrolment has gone relatively smoothly for the handful of big employers who have implemented their plans to date.
But the exponential increase in the numbers of organisations required to set up schemes as 2013 rolls out will stretch the pensions industry’s capabilities to the limit. That is why employers are being urged to start their auto-enrolment planning as soon as possible.
Not only will 2013 be the year when 2.7 million workers are automatically enrolled in a workplace pension scheme, it is also when tens of thousands of small and medium-sized enterprises (SMEs) should start their auto-enrolment implementation timetable.
Estimates of how far in advance employers should start their implementation strategy vary from nine to eighteen months, but the Pensions Regulator suggests all but the very smallest organisations should start planning at least a year ahead.
A year from now employers with as few as 160 staff reach their staging date, the date by which they are legally required to automatically enrol staff into a qualifying workplace pension. That means all large and medium-sized organisations should already have their implementation strategy in place.
The Pensions Regulator suggests all but the very smallest organisations should start planning at least a year ahead
But research carried out in January by the National Employment Savings Trust (NEST), the state-sponsored pensions scheme set up to help facilitate auto-enrolment, found 32 per cent of employers, with between 100 and 999 employees, are unsure of when their staging date actually is.
NEST also found a lack of readiness among larger employers, with only 19 per cent of those with between 1,000 and 4,999 staff ready to comply with the regulations, even though they will need to do so by at least October 1, 2013 and many of them even sooner.
The reason pension experts are recommending at least 12 and ideally 18 months to implement auto-enrolment is the sheer scale of the task employers face.
“Lots of organisations are aware of automatic enrolment and of the date they need to implement by. But many think all they need to do is make sure their existing pension scheme is compliant,” says Charles Cotton, reward adviser at the Chartered Institute of Personnel Development. “They may not appreciate the bigger job is making sure the right people go into the right scheme in the right way and see the right contributions attributed to their pot.”
For most employers auto-enrolment will involve more than simply enrolling staff into their existing pension scheme.
“Employers may need time for a consultation with employees if there are going to be changes to the terms of the pension scheme,” says Robin Hames, head of marketing, Capita Employee Benefits. “They will want to run two or preferably three trial runs of data transfer before going live, they may need to consider getting legal advice if there are changes to trustee rules to reflect auto-enrolment and the organisation will need to model the financial implications of auto-enrolment.”
People already involved in implementing auto-enrolment stress that data management is the key challenge; complying with the regulations is as big a part of the job as actually setting up the pension scheme. That means holding quality, clean data that matches the systems pension providers operate.
Malcolm Small, senior adviser on pensions policy at the Institute of Directors, says: “It is no good pitching up to your pension provider a month before your staging date with a wheelbarrow full of HR files. If your payroll data is not up to snuff, you will find it difficult to get a provider to take you on.”
Both payroll and pension providers are offering “middleware”, software that provides an interface between the employer’s and the pension provider’s systems, and creates a record of compliance with the regulations.
But experts urge access to this middleware, and even access to providers themselves, will become increasingly problematic through 2013.
Auto-enrolment starts with the biggest employers first – those with 5,000 or more employees. But there are only 300 of them in the UK. There are 7,000 employers with 1,000 or more staff, all required to set up a scheme by October, and some are predicting serious capacity problems in the industry.
Research by pension consultancy Towers Watson predicts the camel’s back is likely to break in May or soon thereafter. Its research, which factors in providers’ intentions to recruit extra staff, shows that capacity for providers to comfortably cater for the number of projects they will be required to deal with will be outstripped by demand in a little over two months.
Providers will be operating at around seven times’ normal capacity by the end of 2013, the researchers predict.
“What this means is those who are slowest to make a start on auto-enrolment will end up having to make do with whatever resources are still available,” says Rudi Smith, senior consultant at Towers Watson. “This can mean paying more and getting less in terms of added services, such as workplace presentations and tailored communications.”
Experts are also concerned that important issues, such as charges and default investment fund choices, will be overlooked as employers panic to meet their legal requirements on time. The Pensions Regulator stresses that these are two key features it expects of workplace pension schemes.
Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: “The Pension Quality Mark from the National Association of Pension Funds quotes an annual management charge (AMC) of 0.75 per cent as a good benchmark. Anything at or below this level is in the right ball park.”
Employers may find pension providers and advisers suggesting current employees get a better AMC than those who leave. This practice, sometimes called an “active member discount” or a “departing member penalty”, depending on whether you see it as good or bad, is seen as contentious by some.
Last year the Pensions Regulator indicated trustees of schemes had an obligation to all members of the scheme and not just current employees, which means they must ensure the same charges are offered to everybody in the scheme. Master-trust schemes such as NEST, NOW: Pensions and The People’s Pension offer the same AMC across the board, not only to current and departed employees, but also to all employers and employees, regardless of contribution levels.
But contract-based schemes, such as group personal pensions, still operate active member discounts.
John Lawson, head of pensions policy at Aviva, says: “You don’t let your employees take their company car with them when they leave, so why let them take your bargaining power over pension charges if it means your existing staff pay more? Provided the departing member pays no more than they would as a retail customer, which means anything from 1 per cent or lower, then that seems fair.”
Employers also need to keep an eye on the investment strategy of the scheme’s default fund. Jamie Jenkins, head of corporate strategy and proposition at Standard Life, argues employers should be comfortable with what a provider offers if it has been reviewed in the last three years. “Best practice in default fund investment can change quickly. Ten to fifteen years ago, with-profits funds were considered best practice in default funds, but they are certainly not any more,” he says.
Employers have no choice but to implement auto-enrolment. Start early and it can be presented to staff as a valuable benefit given by a responsible employer. Leave it to the last minute and risk fines for missing your deadline and the opportunity to engage with your workforce in a positive way.
