Choosing the right technology and a suitable partner can ease employers’ burden in complying with auto-enrolment, says Peter Glancy
Employees across the UK are not saving enough for their retirement, with only half the population preparing adequately and one in five doing nothing at all, according to Scottish Widows’ 2011 Pension Report.
Auto-enrolment is a huge step in the right direction and an important building block in the government’s pensions reform agenda. However, implementation and then ongoing operation of the new regime could present a considerable challenge for employers.
Employers face three challenges: finding the funding to support extra pension contributions; putting processes and systems in place to demonstrate full compliance with the new employer duties; and putting processes, systems and resources in place to handle the extra administration.
Employers need to consider their existing pension provisions and whether these can simply be extended to other employees without change. They must consider the earnings definitions that are most appropriate as a base of calculation for their workforce. They need to consider the cashflow consequences and how this impacts on total employee spend on remuneration, reward and recognition.
These new employer duties are a legal requirement and employers will need to demonstrate compliance, just as they do with VAT and corporate tax legislation. Failure to do so will result in fines that could escalate substantially.
We move from a world where pension schemes have new entrants, increments, premium holidays and leavers, to one where we have people moving up and down through salary thresholds, passing the age of 22, opting out, three-year re-enrolments, three year re-opt-outs, and so on. The risk of an administrative disaster is enormous.
To avoid administrative meltdown and to ensure full compliance with the new duties, it will be important to maintain absolute synchrony between the employer’s own records and those of its scheme administrators at all times.
Technology is crucial to auto-enrolment success.
Modelling tools are available to help employers make the many calculations required to determine the best way to meet the financial challenges of auto-enrolment, while maintaining an attractive employee benefits package as a recruitment and retention differentiator.
Modelling tools are also available to help employees determine how they should respond. Doing the minimum required will not give a particularly good outcome at retirement for those on higher earnings. Most people want to retire on a level of income proportionate to their earnings while in employment. As the underpin from the state will be flat, those on higher earnings will experience the greatest drop in their standard of living if they do only the minimum required through auto-enrolment.
Technology is being developed by payroll providers, employee benefits consultants and pension providers to help employers with their new duties.
Technology supporting employers must deliver three key outcomes. First, the employer must be able to demonstrate full compliance with the new duties with ease. Second, the establishment costs for the employer should be minimised. Third, the ongoing administrative overhead for the employer must be minimised.
Employers must also consider how they will interact with this technology. It cannot operate on a standalone basis.
Interaction with existing HR and payroll systems will be required and some employers will want interaction with flexible benefits systems. They need to plan for and resource the internal IT development work involved.
It is also likely some employee benefits consultants and corporate advisers will provide a broader service, taking on the administrative effort, so employers should consider whether outsourcing is a suitable option.
There is a lot to think about, so don’t leave it too late.
Peter Glancy is head of corporate propositions at Scottish Widows
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