By Kevin O' Kell, Altus
With October’s deadline looming, the UK’s largest employers will already be well advanced in their auto-enrolment plans. A far larger number of mid-sized businesses may be only just waking up to the scale of the challenge facing them next year. With a range of service offerings from payroll and HR outsourcers, employee benefit companies, pension providers and software suppliers, the ground is ripe for confusion. So, how do you choose the right option, and what are the operational and implementation pitfalls of each one?
What’s your current situation?
Organisations staging before the end of 2013 will almost certainly already have an existing pension scheme. But is it compliant with the auto-enrolment rules? Apart from the minimum contribution rules, the existing scheme may have extended waiting periods, age restrictions, or other eligibility criteria that would exclude some of the new scheme entrants. Employers must consider entitled workers too, who will need access to a scheme even if not being auto-enrolled.
The Pension Regulator’s DC qualifying scheme tool will help employers assess their current schemes. Any rule changes to trust-based schemes will have to be approved by the trustees.
Scheme Options
The list of scheme options is too broad to list here, but the dominant ones are likely to be
• NEST or other master trust as the sole scheme
• In-house compliant scheme
• Existing scheme plus NEST / master trust for some categories e.g. lower earners
• Group personal pensions – enrolment managed by an EBC or provider
Many pension providers have built propositions that will manage enrolment to multi-tiered arrangements between their offerings and a master trust, based on employer-specified entry criteria. Pension administrators, payroll companies and HR and benefits providers are also offering to plug the gap and channel contributions to multiple schemes on the same basis. Some of these companies are offering stand-alone auto-enrolment software that fits between any HR, payroll and pension system to do all AE processing, some even managing the employee communications.
If an existing scheme is adopted, the incumbent providers may have the advantage but only if they can accommodate and implement the necessary changes. Will worker assessments, opt-outs and re-enrolments be owned by HR, payroll or pensions administration teams? How many payroll systems are feeding the pension scheme? Are any of these functions run using internally built software and is there in-house capability to adapt it in time to comply? Dedicated third party software is emerging to sit between payroll and pension systems to handle auto-enrolment specifically.
Operational hurdles
Auto-enrolment presents a number of technical challenges, the first of which is the ongoing assessment of your workforce’s eligibility and qualifying earnings. Payroll and HR suppliers, who typically “own” the employee data, are arguably in the best place to be able to monitor and react to this constantly changing picture. However they are not pensions specialists, and many mid-size to large companies operate two or more payroll systems. Faced with migrating to a single payroll, employers may prefer to facilitate auto-enrolment nearer the pension provider end of the process.
The same applies to maintaining details of opted-out workers and re-enrolment dates. HR and payroll typically operate closer to the employer and maybe first to receive opt-out data. However some pension and flexible benefit providers who deal directly with employees are offering opt-out via the web, and are well placed to manage this process too.The burden of processing contribution refundswill fall to the party (employer or provider) who is holding these funds – designing an automated solution will be key.
Managing small pots accumulated by short-service leavers and opt-outs will present a problem whichever option is chosen, but principally impact the pension provider’s costs.
Opportunity
Employers can treat auto-enrolment as an opportunity or a nuisance. Those in the latter camp may be tempted to target low retention to manage down payroll costs, and should be reminded that these savings will at least in part be offset by the administration burden of re-enrolment and refund processing.
On the plus side, even a legal requirement can represent a new way to engage and motivate people. Early engagement with staff and unions can really maximise the chances of a successful scheme with low levels of opting out.
Benefit consultants and flex providers may claim the edge here with their experience of employee engagement. A new pension scheme can be offered alongside a range of optional benefits such as life insurance and offer real choice where pure HR and payroll outsourcers could not.The range of investment options (including the default choices) should be matched to the employer’s worker profile, again more the benefit consultant’s strong point – but be aware that some consultancies have their own third party administration services to sell.
Summary
This article can only scratch the surface of the auto-enrolment challenge facing the UK’s employers. To really navigate the maze,decision-makers are going to need clear models of each option to understand the trade-offs inherent inthat arrangement. Getting hold of those models from a neutral source may be the first challenge.
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