You need right kit to make changes

Legislation coming into force in October will require employers to auto-enrol employees into a pension scheme. The legislation, which was introduced in the Pensions Act 2008, will require employers to undertake a number of duties to comply with what are being dubbed the most transformational pension reforms in recent history.

Duties will include the categorisation of employees to determine their eligibility for auto-enrolment, based on three classifications – entitled worker, eligible jobholder and non-eligible jobholder – so they know how to treat them when implementing and managing the auto-enrolment process.

Employers are then required to automatically enrol eligible employees into a qualifying pension scheme, pay employer contributions and provide a comprehensive communications strategy to inform employees about their auto-enrolment and what they are required to contribute to the scheme.

Employees must also be informed how to opt-out of the scheme if they do not wish to remain a member, since auto-enrolment into a qualifying pension scheme is compulsory, but ongoing membership is not. Finally, records of all pension scheme members must be kept for six years.

But the biggest task employers face is deciding which technology to invest in to help them manage this complex process and ensuring it integrates fully with their existing employee benefits platforms.

Employers first need to manage their expectations. Rudi Smith, senior consultant at Towers Watson, explains: “The most obvious impact is that, for the vast majority of employers, in order to meet the timescales that have been set by the government to undertake auto-enrolment requirements, then they are going to have to use some form of technology. In most cases the technology they need to use doesn’t match or really fit the technology they use now – the functionality isn’t there.”

Martin Freeman, head of technology product strategy at JLT Benefit Solutions, says employers need to be proactive in deciding how they want to operate auto-enrolment. “There’s a certain amount of flexibility and the way they can use that within their own circumstances will make a difference,” he says.

Postponement is a case in point, he says. Employers can either run their categorisation assessment the day after an employee gets paid or postpone this assessment until the beginning of the pay period. “Everything will start with their payroll cycle,” says Mr Freeman. “Postponement will enable them to make sure that the data they need to be assessing, and the time they want to do that assessment, fits in with their payroll cycle.”

He adds: “The reason employers need to get a handle on this first is because, when they come to evaluate the options, they can tell providers what they want and ask if it can be done.”

Mr Freeman warns that, because the legislation is new, there currently exists a scenario whereby employers are identifying the approach they believe best suits their circumstances, while many technology providers are offering their best guess, which is typically different to what the employer wants. “The differences are at that subtle level of detail; they are quite technical, low-level details.”

The biggest task employers face is deciding which technology to invest in to help them manage this complex process

Employers must then decide their preferred technology provider. There are three main provider groups battling for auto-enrolment business – payroll providers, pension scheme providers and third-party providers, including employee benefits providers and administrators.

Arguably, payroll providers and benefits providers are best-positioned to serve employers because of their established platforms and integration with one another via relatively simple web interfaces, plus the fact that they already hold employee data.

However, payroll providers have been slow in communicating their service offering to the market, by Carsten Staehr’s own admission. The chief executive of Cintra HR & Payroll Services says: “There has been a lack of communication between payroll providers and pensions providers; there have been bad things on both sides.

“Pension providers thought they could do it all, but realised that they needed payroll providers and vice versa. Payroll providers were busy with Real Time Information [an HM Revenue & Customs’ project requiring updated details of tax, National Insurance contributions and other deductions] so thought pensions providers could do the work.”

Mr Staehr insists that the two parties have reconciled their differences and that the first phase of Cintra’s auto-enrolment service, which he says will provide a comprehensive service, including employee assessment and communications through to integration with existing benefits platforms via web interfaces, will be released in October.

But given that auto-enrolment is essentially a pensions administration project, pensions providers seem particularly well-suited to helping employers with their auto-enrolment efforts. However, they do not have access to employee data, only employees’ pension scheme membership details.

While pensions and payroll providers have been grappling with these challenges, third parties, including Alexander Forbes, Xafinity and Staffcare, have been exploiting the open playing field with their integrated service propositions.

For example, Alexander Forbes’ service provides an integrated system, which at the front end for employees includes communication to notify those employees who have been auto-enrolled, the ability to opt in to the system, and then to make further selections around contribution levels and investment choices using its online pensions modelling tools. At the back end for employers, the system categorises employees, manages the opt-in and opt-out process, and the contribution payments, plus the communications strategy around the whole process. The software is fully integrated with employers’ benefits and payroll systems because it sits on a benefits platform.

But Steve Watson, head of DC [defined contribution] at Alexander Forbes, warns: “One of the issues is that if you’re not careful, the auto-enrolment process will become the antithesis of engagement, with those opting out more engaged than those opting in.”

Ultimately, the biggest challenge for employers is to fully understand the operational intricacies of their workforce and then work out the extent to which individual providers, irrespective of their claimed expertise, can meet these needs.

Moreover, employers must realise that, to some degree, all three provider groups will be involved in delivery.

As Mr Freeman concludes: “It may very well be a bit of a mix and match because, when you look at what auto-enrolment processing requirements are, essentially it’s about assessment, deduction, enrolment, opt-in, opt-out, re-enrolment and record keeping. And alongside all of that go communications and the wider issue of fit with wider benefits administration.”