Uncertainties Still Surround Auto-Enrolment

Next year will see the start of a huge revolution in the provi­sion of workplace savings. Pensions auto-enrolment, under which all employers will be compelled to offer most of their workforce a pension, will commence.

For many businesses deciding how to handle the detail will involve senior deci­sion-makers in the company, from pen­sion fund trustees to the finance direc­tor. Preparing for it on both a practical and financial level requires some signifi­cant decisions as auto-enrolment is not just a pensions problem, but the sooner preparations are made, the easier it will be to comply with the legislation. The UK’s larger employers have only one or two years before their staging dates to comply with the new regime or face pen­alties of up to £10,000 a day. However, even with constantly changing legisla­tion and delays one of the biggest barri­ers is that gaps still remain in the legisla­tion surrounding auto-enrolment.

One example of the limitations of cur­rent detail is the lack of definition of a ‘qualifying scheme’, for companies that want to use their existing pension ar­rangements for auto-enrolment. The Department for Work and Pensions (DWP) currently has a draft version of the certification, but the finalised version at the point of writing has not been re­leased.

There is still confusion over whether the DWP will abolish short service re­funds. These allow employers and em­ployees to reclaim their basic contribu­tions if they leave a trust-based scheme within the first two years. This could have a substantial impact on the type of scheme that employers, particularly those with high staff turnover, choose to implement.

Awareness amongst employers still remains low even though the costs for employers could be substantial. Not only will employers have to cover the cost of pension contribution for relevant work­ers, but also the cost of dealing with the implementation and administration will have to be factored into corporate busi­ness plans and it is recommended that employers undertake financial modeling to understand the budgetary implica­tions.

Not all employers will be able or want to cope with the extra burden of running their own pension scheme and will be drawn to the prospect of using NEST, the the Government-backed large scale al­ternative pension arrangement, but NEST has yet to formally open its doors to business and prove itself in a live en­vironment. By deciding not to include support for connecting NEST to compa­ny payroll systems, it may have been a hasty decision as Insurance companies and other providers competing for the same business are offering to solve the data management headaches for employ­ers as a part of their offering. We are seeing competition for the ‘market’ iden­tified by NEST. ATP, the Danish Labour Market Supplementary Pension has an­nounced the launch of NOW: Pensions, an independent multiemployer trust in the UK which is being set up in anticipa­tion of auto-enrolment and will be open for business from early 2012.

Communication and engagement exer­cises will be as important as the benefits themselves. Building information sys­tems within existing online systems will make it easier for the employer to engage their staff as auto-enrolment will not create value for the employer unless em­ployees really understand what they are getting.

Segmentation of staff will be a HR model that may be adopted by employers, using NEST for transient, low paid, un­engaged staff. This would have the ad­vantage of affecting traditional pension scheme providers’ charging structures as small monthly pension contributions do not appeal to current providers and the product terms offered will be re­flected accordingly.

I have mentioned before in similar arti­cles that the governance of Defined Ben­efit Schemes is being translated to De­fined Contribution Schemes. This is highlighted within the guidance issued by the DWP about default investment options for auto-enrolment, which in­cludes a requirement for full reviews every three years and whenever certain events occur such as developments with­in the economy.

Although feeling frustrated at further regulatory developments the employer has a lot to consider over the next few years including revisiting current pen­sion scheme arrangements, implementa­tion issues, including opt-in and opt-out processes and employee communica­tion. One of the challenges will be main­taining the governance structure once everything is in place.