 By Paul Leandro, Associate at Barnett Waddingham
When the announcements were made that auto-enrolment will be introduced, the immediate question from employers was “how much is this going to cost?” Whilst it was clear that extra costs will be incurred due to the additional pension contributions employers will need to pay, the full costs involved with dealing with the administration of auto-enrolment are only now being recognised. In this article, Barnett Waddingham Associate, Paul Leandro, outlines some of the matters employers might not have considered in respect of the administration burden auto-enrolment will bring.
The onset of auto-enrolment will introduce processes that HR teams have never had to deal with before. The continuous monitoring of employee movements between the different categories of “worker”, having to keep records of opt outs, opt ins and re-enrolments (otherwise known as the “opt out hokey cokey”), having to certify schemes on an annual basis and having to continually comply with the regulations is going keep HR and payroll teams very busy.
Auto-Enrolment Software
To help with the extra burden, pension providers, payroll providers and other organisations are developing “middleware” software systems, designed to plug into payroll and pension systems to streamline the auto-enrolment process. However, employers should not assume that these systems will automatically cure their admin woes.
Whilst “middleware” will no doubt be helpful for dealing with the basic auto-enrolment processes, many providers’ have (at least initially) developed systems which are designed on a one-size-fits-all basis. Employers should not assume that these systems will be able to cater for all of their specific needs.
For instance, some providers’ systems will generate automatic mailings to employees’ home addresses, which might not fit with the employer’s preference on how the auto-enrolment process should work. Some employers, for example, will prefer to allow new hires as much time as possible to opt out after receiving their first payslips after being enrolled. This can be done, but will need careful planning in terms of the auto-enrolment information issued to employees before the payroll date, as providing certain information (which providers might automatically include in standard notices) may trigger the one month opt out period before the employer wishes it to.
There are some independent software houses developing auto-enrolment systems that will arguably be more flexible and could be tailored to fit with various payroll and pension systems, but are likely to come at a price.
Whatever an employer decides to do, it should be aware of the potential risks of subcontracting the auto-enrolment administration. For example, legal advisers are highlighting that if third party systems provide opt out forms to employees, this will contravene the rules that state that opt out forms should be provided from pension schemes only. If employers are subcontracting the administration of auto-enrolment, they should also subcontract the risks that go with it.
Employers should be clear on how they would like to work within the auto-enrolment process before they decide on what auto-enrolment software to use, if at all.
Salary Sacrifice / Flexible Benefits
Many employers are looking at the National Insurance (NI) savings experienced through salary sacrifice as a way of offsetting their increase in costs due to auto-enrolment.
Whilst this will be allowable under auto-enrolment, employers should be careful to consider how the salary sacrifice arrangement will operate. For instance, employees who are auto-enrolled cannot be required to commit to salary sacrifice to become (or remain) a member of the pension scheme.
To maximise the NI savings, employers could look to setting salary sacrifice as the default method of making contributions, but to do so they must ensure that employees are given the option of making contributions via the normal method before they are enrolled.
The same level of care will be needed with operating a flexible benefits scheme. Flexible benefits can work alongside auto-enrolment, but the guidelines state that the purpose of a flexible benefits arrangement must not be to induce the opt out of a pension scheme. Employers allowing employees to opt out or flex down their contributions to non-qualifying levels in exchange for other benefits should be confident that an inducement is not being made.
Employees opting for contributions lower than the minimum levels will be classed as opt outs and will need to be re-enrolled at the qualifying levels every three years, when they could have the option of reducing their contributions again (did I mention the opt out hokey cokey!).
Conclusion
Employers should not under-estimate the upheaval auto-enrolment will bring to HR and payroll processes. Whilst finance teams will be gearing up for the extra costs, HR teams should be preparing for the extra layer of admin and employee communications they are going to have to contend with. Careful planning is needed. The new rules are complicated and unless employers are fully prepared, things will be missed and the risk of financial penalties will be widespread.
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