If you read nothing else, read this…
• The staging dates for employers with between 50 and 249 employees to comply with the pension reforms will be staggered between 1 April 2014 and 1 April 2015.
• Employers may use existing schemes for all eligible staff or set up new arrangements for the newly enfranchised. Where an existing scheme is widened, the provider may renegotiate its charges to reflect the wider membership profile.
• Initially, the new regime will require some big decisions, communications arrangements and administrative effort from employers.
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Case study: Existing DC scheme is fine at Thomas Miller
Thomas Miller, a boutique insurance business that manages other insurers, runs a defined contribution (DC) scheme with 340 active and 185 deferred members.
Grant Lore, group pensions director, says: “A decision has been taken in principle to use the existing DC scheme to meet auto-enrolment requirements. In fact, the scheme has a wide eligibility condition, so it is unlikely this will mean the scheme is offered to many, if any, individuals who are not already eligible to join.”
Take-up is currently around 90% among an employee base that includes lawyers, accountants and support staff.
“The company is committed to a balanced remuneration strategy and therefore is factoring into budgets the additional potential costs from auto-enrolment, assuming those who have not joined do not opt out once auto-enrolled,” says Lore. “In the context of overall costs, this is not high given the existing take-up rate. It will also preserve a consistent approach to company pension provision.”
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Smaller employers will have their work cut out to comply with pensions auto-enrolment and need to act as soon as possible, says Ceri Jones
In the biggest overhaul of pensions for decades, every employer will, in the next few years, be obliged to offer a workplace pension and automatically enrol their staff. Although the reforms will affect organisations of all sizes, smaller employers must be aware of how they could be impacted.
All employers will ultimately have to contribute at least 3% of employees’ salary, with staff adding 4%. Any employee who wants to leave the scheme will have to actively opt out.
The new regime begins this autumn and will be phased in according to employers’ size. Those with more than 120,000 staff will be required to auto-enrol jobholders by 1 October 2012; employers with more than 250 staff between 1 October 2012 and 1 February 2014, while those with 50 to 249 have from 1 April 2014 to 1 April 2015. The start date for employers with 49 staff or fewer will be between 1 June 2015 and 1 April 2017.
Employers must register their scheme with The Pensions Regulator within nine weeks of their staging date. Lee Hollingworth, head of defined contribution at Hymans Robertson, says: “The staging dates are not a million miles away. We believe it is an 18-month process and employers should start by setting clear objectives, getting the design of their scheme right, looking at the process of redesigning payroll to meet obligations, and planning communications. Some small employers went into shock and then denial that they must provide these benefits, but are now entering the acceptance phase.”
Big administrative effort
The changes require a big administrative effort, particularly for small employers that may lack flexibility in their HR resources. The regime covers full-, part-time, fixed and temporary workers, divided into three categories for which different rules apply: eligible jobholders aged between 22 and the state pension age (SPA) with pay above the earnings trigger for auto-enrolment; non-eligible jobholders aged between 16 and 22 or over the SPA but under 75 and with qualifying earnings; and entitled workers aged between 16 and 75 but earning below the lower limit for qualifying earnings.
Small employers with no existing pension may choose to offer the national employment savings trust (Nest) or a provider targeting small employers, such as The People’s Pension, run by construction industry pension provider B&CE, and Now: Pensions, an arm of Dutch company APT.
Other employers may continue with their main pension scheme for managerial staff and add a lower-cost plan for other workers such as the less well paid and itinerant.
Segmentation will be common
Tom McPhail, head of pensions research at Hargreaves Lansdown, believes segmentation will be common among smaller employers, with Nest and other low-cost schemes used for staff who have not been eligible for the employer’s primary scheme but are covered by auto-enrolment.
Modifying an existing pension scheme is probably the easiest solution in terms of administration, but members may have to be consulted on the changes. However, many providers of existing schemes will not be happy to retain them on the same terms if they are open to all eligible staff, particularly if the scheme is small. Noel Birchall, national consulting director at JLT Benefit Solutions, says: “Some providers are reserving the right to change their annual management charge if more low-earning types join. Providers all want the same sort of scheme members: stable, attractive and low turnover.”
Birchall also thinks many small employers will run segmented schemes and that pension providers, keen to maintain the existing profile of schemes on their books, will help facilitate that. “There is a feeling that organisations that are serious about employees have already set something up and what is left is the reluctant employers which are seen as less attractive,” he says.
Obtaining good terms
For small employers, this may be a particular problem because obtaining good terms for small schemes has always been difficult. Dominic Fryer, UK corporate strategy manager at Friends Life, says: “The reason small employers were not serviced before is that providers could not do it profitably. Some providers are targeting small employers, but across the market a lot of pension providers’ margins are very thin. It is hard to see how the newcomers can do it profitably, and the government, of course, is subsidising Nest.”
Keeping abreast of the data required for the reforms will be tricky for small employers and most pension providers are developing middleware IT systems to help categorise staff. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: “Employers will need to divide the workforce into three groupings to assess who should join the scheme, and they will need to monitor constantly if a member goes over the earnings trigger. Small employers are more exposed because of their smaller cashflows and scarcer resources.”
The new pensions regime will require some big decisions, administrative effort and strong communications, so employers of all sizes should prepare early.
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Contributions for qualifying schemes
• Employers can self-certify that their pension scheme meets the quality standard. The conditions are: Contributions of at least 9% of pensionable pay (4% minimum from employer).
• Contributions of at least 8% of pensionable pay (3% employer minimum) with pensionable pay calculated as at least 85% of total pay. Contributions of at least 7% of pensionable pay (with 3% minimum from employer) where 100% of pay is pensionable.
• There may be room to manoeuvre. Qualifying schemes can be trust- or contract-based.
• To qualify, a defined benefit scheme must provide at least 1/120th accrual.
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