How to avoid the pitfalls of pensions auto-re-enrolment

It is now three years since auto-enrolment was introduced and large employers must now begin to prepare for auto re-enrolment, the policy put in place to ensure that eligible jobholders who opted out of their workplace pension scheme in the first round are not left in the pensions wilderness but are again encouraged to be a member of  their employer’s scheme.

If you read nothing else, read this…

  • Employers must auto re-enrol their eligible staff in a six-month window around the anniversary of their original staging date.
  • The government has introduced some exclusions to avoid duplication of effort regarding staff who have stepped away from the pension scheme within the last 12 months. It is up to the employer to decide whether to automatically re-enrol this group, but there is no obligation to do so.
  • For some employers that used their pension provider to handle the process during the first round, the second round could prove an opportunity to switch the task to their payroll provider.

As in the first wave, employers must identify eligible staff, and if they are not already active members of the workplace pension, the employer must re-enrol them on the chosen date and start contributing to their pension from that point.

Re-enrolment responsibilities

Employers can choose a re-enrolment date that falls anywhere within a six-month window starting three months before the third anniversary of their staging date and ending three months after it, so there is flexibility to juggle the timing around workloads. However, the employer cannot postpone re-enrolment, as they might have done in the first round, and must use the same date for all staff to be re-enrolled.

Crucially, employers do not have to assess all their employees to identify who meets the eligible jobholder criteria, but only workers who have opted out, ceased active membership or reduced their contributions to below the minimum level. The assessment of worker categories for auto re-enrolment is separate from the ongoing assessment process run in each pay reference period.

Exempt employees

To make the process less cumbersome, the government has made some concessions regarding who must be auto re-enrolled. Employees are exempt if they are soon to leave the business, and exemptions also apply to people with tax-protected status so that they are not forced into a position where new contributions would breach their protection and prompt a large tax bill.

Andrew Cheseldine, defined contribution (DC) specialist at Lane, Clark and Peacock, explains: “In this case, the employer is covered if [it has] ‘reason to believe’ the member is protected.

“We’re suggesting that employers write to such members saying they will be auto-enrolled unless they submit a statement saying they have protected status. However, sometimes people lose their protection and the position could then become somewhat muddied.”

National living wage pitfall

On the whole, neither the task of auto re-enrolment nor the ongoing additional cost should be a huge burden for employers because, although original estimates from the Department for Work and Pensions suggested that around 30% of employees would opt out, in the event only 8% have done so. Unless the people who opted out have experienced a change in financial or family circumstances, or have developed a taste for the new pension freedoms, they are likely to opt out again. 

The prime impact will be for employers with disproportionate staff on the new national living wage of £7.20 an hour that comes into effect in April 2016 for employees aged 25 years old and over. This will ensure that all employees working over 20 hours aged 22 and above qualify for auto-enrolment.

“The auto-enrolment triggers are all built around the minimum wage and the national living wage will push another one million into the auto-enrolment bracket, reflecting those currently earning around £9,500 who will be pushed up to £10,500, over the earnings trigger,” says Cheseldine. “This may have a greater impact for the next wave of employers rather than the current wave, which primarily consists of the largest retailers, which turn over 80-90% of their staff every year, making them less likely to be members.”

Reassess provider

Most employers will be using their pension providers to automate re-enrolment processes, but it may be a good juncture to reassess who is best placed to do the task. Lee Hollingworth, head of DC consulting at Hymans Robertson, says: “At the time of the first wave of auto-enrolment in 2012, payroll providers had not kept pace and the void was filled by mainstay pension providers. Some [organisations] may want to revalue that position now. It may be more optimal to undertake the assessment process through the software currently available from their payroll provider, which will have now caught up. Surely it makes more sense not to send the information to a third party but to automate it, as the risk of manual error is reduced?”

Splitting auto-enrolment duties with equal weight between HR and payroll will prevent auto-enrolment processes being over-ridden by either, says Robert Kingston, consultant at Johnson Fleming. “Auto-enrolment compliance is an ongoing duty, which not only requires addressing once every three years but requires an ongoing compliant process and the ability to be auditable,” he says. “It’s essential for employers to align their auto-enrolment strategy with their wider business objectives for broader benefits and pension provision. Is [their] compliance strategy based on the cheapest cost available, or on achieving maximum return on investment? What may seem to be the cheapest option could incur large in-house administration burdens. We advise employers to assess the quality of delivery, and the impact on internal resource, as well as price.”

The communications piece will also need some thought. Employers must write to each individual who will be auto re-enrolled, within six weeks of the chosen date, to explain what will be happening. However, many employees will not take this fully on board and may resent the situation when contributions are docked from their pay, particularly for a second time.

The employer must re-register with The Pension Regulator once it has auto re-enrolled the scheme, within two months of the date. If it does not have any eligible staff to re-enrol, it must still reregister but then the deadline will be the day preceding the third anniversary of its original declaration of compliance.

Case study: Boots prepares for pensions auto re-enrolment EB_011115_022.pdf

Boots, a member of Walgreens Boots Alliance, is facing its first cyclical re-enrolment in January 2016 and has identified around 2,000 staff that must be assessed and potentially automatically re-enrolled.

The Alliance Healthcare and Boots Retirement Savings Plan (AHBRSP), a group personal pension scheme, was established in 2010 with Legal and General, and a section for auto-enrolment, called the AE Scheme, was introduced in 2012. Just over 22,000 eligible jobholders were auto-enrolled in February 2013, and there are currently about 25,000 members in each of the main AHBRSP and the AE Scheme.

Julie Richards, group director of pensions at Walgreens Boots Alliance, says: “It is the first of our UK employers to have to deal with re-enrolment and we are at an advanced stage and on schedule in our preparation. We started preparing for this as early as May. A notification to impacted Boots colleagues is being sent out at the end of October with a manager briefing being sent out beforehand and the standard auto re-enrolment letter will be sent in January.

“The key priority is to look at the definition of employees and make sure, working with payroll, that they have been clearly identified, and that the appropriate processes are in place. This project also provided a good opportunity to work closely with payroll to focus on improving the quality of our information management in this area.”

Richards’ tip is to prepare early, and to make sure the business knows auto-re-enrolment is coming, particularly as it might contribute to a spike in workload for line managers. Store managers need to be made aware that this is coming and they can help in making sure that employee payroll details and addresses are up to date.

The pensions team also put together a briefing pack, which includes notes for HR business partners, line managers, and employees, and a copy of the letter telling the eligible employees in advance what is happening. This is supported by a pensions website where information about retirement savings and auto-enrolment can be found.

“Doing this for Boots is also helpful preparation for our other UK businesses that will have to deal with re-enrolment later in 2016 and in early 2017,” adds Richards.

Walgreens Boots Alliance has eight employing entities in the UK. Five had a staging date of November 2012, with the others spread through the following 18 months.

One area of the ongoing auto-enrolment processes that needs careful monitoring is the spike in temporary staff at peak periods such as Christmas.  Although Boots uses a three-month postponement period, it is possible for some employees to tip over into four months’ employment, which would mean they have to be enrolled, even if they then subsequently leave within a month or so.


Viewpoint: Employers need to invest time in pensions auto-re-enrolment jen ackerman

For many large employers their staging date is a distant memory and auto-enrolment has become business as usual. Nevertheless, there is still more to do as the third anniversary marks the first re-enrolment cycle.

The good news is employers do not have to repeat everything they did on their staging date. Re-enrolment should be less onerous because it only applies to those who opted out in the first round. However, as always, it is important to get the details right.

First, employers must choose a re-enrolment date. This can be any day three months either side of their staging date’s third anniversary. Employers should double-check their staging date: it should not be confused with a deferral date if they used postponement.

Also, if there are multiple employers in the same corporate group they may have different staging dates. They also need to be strategic. The re-enrolment date cannot be postponed for individual workers and employers should consider aligning it with their pay reference dates. 

Employers need to consider key business dates because additional worker assessments, communications and contribution deductions will be required, so it would be sensible to avoid other busy periods.

All employers should revisit their service contracts with pension providers to ensure re-enrolment is within scope. Early engagement is essential, particularly for large employers, which may be the test case for their provider’s systems and software.

For many employers, the law will have changed since their staging date. When implementing re-enrolment, employers may also wish to incorporate some of the helpful easements that were introduced in April 2015. This includes an employer discretion not to enrol those who have opted out in the previous 12 months, are due to leave their job or have pension tax protection.

Looking ahead, re-enrolment should be a case of repeating the same process every three years, so it is worth spending time getting it right first time.

Jen Ackerman is an associate at Hogan Lovells