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- Every employer must be ready for auto-enrolment, so start planning early. What is the corporate strategy? They should work out how much they want to achieve and can afford.
- Know the workforce – segment them and consider how they may react. The closer to the minimum wage, the more sensitive workers are to deductions.
- Communication is important. The more employers do, the more successful auto-enrolment will be.
- The success of the project – and being able to comply with the regulations – depends on employers’ ability to integrate auto-enrolment with their benefits structure, their culture and their technology, particularly payroll.
Various factors will influence the number of staff who decide to opt out following auto-enrolment, says Padraig Floyd
With some employers facing an increase in pension costs once auto-enrolment begins to come into effect from October 2012, how can they assess the potential levels of employee opt-out in order to get a better idea of what they are likely to face?
Budgeting for the costs of auto-enrolment is an important consideration. First, employers should determine the strategic corporate position. How many staff will be auto-enrolled? How much might this increase pension contributions? How will it fit inside the existing benefit structure? Can it be made to fit or does the organisation need a new pension plan? How much can they afford?
These questions should be asked during a full assessment of the pension requirements, says Rachel Brougham, principal and head of auto-enrolment at Mercer. “A wholesale review of benefits should start at least 18 months ahead of the staging date because there is a point when employers can no longer keep themselves out of jail,” she says. “The niceties cannot be timetabled. This needs to be done to ensure they are compliant.”
There are rules of thumb that can give an idea of opt-out rates. Having a thorough understanding of workforce demographics will give a strong indication. For example, there are likely to be higher opt-out rates in the retail and manufacturing sectors because the closer you get to the minimum wage, the more sensitive workers are to changes in their take-home pay.
The next thing to consider is the organisation’s existing benefits. If these are generous, pension opt-out rates are likely to be below average. Some employers may even have to trim other benefits so they can afford to comply with the pension reforms.
Communication is an important factor. The more employers do here, or the better they do it, the more they will achieve.
The final factor is the general environment auto-enrolment is delivered into. The effectiveness of the Department for Work and Pensions’ (DWP) campaign to staff and how the media will represent it will influence opt-out levels. If auto-enrolment is associated with the scandals that have beset financial services, there may be even fewer takers.
But doing nothing is not an option. Every employer has to be compliant by their staging date and this is not an overnight project. One thing to consider is: what is the corporate strategy for growth? Mergers and acquisitions may complicate matters, but the three-month grace period means employers in sectors with high staff turnover can avoid enrolling them into a pension immediately, only for them to move on.
But trying to calculate opt-out levels is not always the best way to plan for auto-enrolment, says Martin Freeman, head of product strategy at JLT Employee Benefits. “People tend to miss the point because they think this is a one-off problem or cost,” he says. “It is not. It has to be done every three years and every time someone changes jobs.’
Some of the biggest problems in the auto-enrolment projects already undertaken have involved integrating the process with payroll technology. Employers should ask whether their existing provider can handle it. If they cannot, they may have time to put it right.
The DWP has predicted a 25% opt-out rate, but this was before the economic downturn and may be higher. All employers can do is make sure they are ready.
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