Auto-enrolment prompts employers to review their benefits offering

When the auto-enrolment process finally got under way in October 2012, no one knew exactly what to expect. For some employers, it was little more than tinkering with an existing system; for others, it was a major project involving entering most of their workforce into a workplace pension scheme for the first time.

Eight months on, things have become a little clearer. The most striking aspect has been the relatively low level of opt-outs. In the run-up to auto-enrolment, surveys predicted opt-out rates in excess of 30%, but the reality has been different. Will Aitken, senior consultant at Towers Watson, says: “The normal take-up we’ve seen has been 90-95% and that’s pretty much across the board, even in populations that are supposedly very unengaged.”

Pension contribution levels

Employers have also resisted the temptation to level down contributions. Instead, where they had a large non-pensioned population, the tendency has been to create a separate plan, offering the minimum levels of contribution required under auto-enrolment, running alongside an existing scheme.

Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD), says: “There is often a mechanism for people to graduate from that type of arrangement to one that had been offered to existing employees when they have been around for a certain length of time, or have shown a certain amount of commitment to the organisation.”

Over time, this could lead to a levelling down by stealth, Aitken says. “It’s not explicit because people who are already in the scheme are not getting lower contributions, but as time goes on, those new people will become the norm,” he says. “It might only emerge over a decade or so, but it is happening.”

Some employers are using auto-enrolment as part of a broader reward strategy to promote the wider use of benefits and introduce new ones that will help them achieve better staff engagement and retention. “It’s only the larger organisations that have wrestled with this, but there seems to be more of a holistic approach to wealth management, as well as issues around financial literacy and awareness,” says Cotton.

Research conducted by Employee Benefits confirms this. According to The Benefits Research 2013, published in May, 62% of employers said their benefits strategy for 2013 would be influenced directly by auto-enrolment, and 21% by concerns around an ageing workforce.

Philip Smith, principal and head of defined contribution and wealth at Buck Consultants, says: “[Employers] are trying to give employees a wake-up call and show them they won’t be able to walk out of the door at age 55 like the previous generation did. They are beginning to invest in member engagement strategies, putting in place online tools, running seminars and getting people to come into the workplace to offer not necessarily advice but information.”

Financial planning education

Helen Bidgway, head of HR at The Whitgift Foundation, a charity that operates care homes and schools, says the organisation is offering above-minimum contribution levels for staff who are not currently in its existing pension scheme, automatically enrolling them with an employer contribution of 4% and staff putting in 2%. It is also offering financial seminars, provided by Secondsight, to boost take-up.

“We are offering people the opportunity to have a one-to-one session before they join the scheme to make them think about what pensions they already have, and how much they might want on retirement,” she says.

Emma Douglas, head of workplace savings at Mercer, says the launch of auto-enrolment should, in theory, be a good time for employers to think about additional financial products, such as corporate individual savings accounts (Isas).

“It’s a great time to have a conversation about the wider benefits structure, but that has tended not to be the case because people are focused on getting the auto-enrolment bit right,” she says.

The Benefits Research confirms this: the number of employers looking to provide financial advice stood at 17% in 2013, the same as in 2009.

However, some employers are using auto-enrolment as an opportunity to promote their existing benefits offering. Clare Abrahams, head of auto-enrolment at Lorica Employee Benefits, cites fast-food retailer KFC as an example.

“For KFC, it was all about employee engagement, including developing substantial communications and pitching the benefits in a way that would be appreciated by employees,” she says. “It had one-to-one sessions, presentations and workshops, online learning tools, posters in the workplace, training for managers to help communicate the changes to their team members and full benefit branding with sweets, magnets and Post-It notes.

“It is the perfect example of going above and beyond what its statutory duties would require to really help employees understand and embrace their benefits.”

Cost-reduction exercises

However, there are signs that other businesses may look to reduce benefits, perhaps in order to meet higher-than-expected costs from auto-enrolment. Towers Watson’s Aitken identifies a trend towards fixed-period benefits for group income protection rather than paying out until age 65, as well as higher excesses being introduced around private medical insurance. “It effectively throws some of the cost on to employees,” he says. “This is happening in parallel, but it’s hard to say whether it’s a result of auto-enrolment.”

Buck Consultants’ Smith, meanwhile, suggests there is a move to restrict certain benefits that have traditionally been offered alongside pensions, such as life cover, to those already in existing plans.

“We haven’t seen the extension of benefits packages to those populations in the way you might expect,” he says.

Smith cites the example of one [employer] that was perfectly happy to offer the ‘full-fat’ pension scheme with four-times-salary life cover for people who enrolled voluntarily, but offered just one-times salary to those who were auto-enrolled.

Other employers are using the introduction of auto-enrolment to overhaul how their benefit schemes are set up. James Gilbert, pensions consultant at Thomsons Online Benefits, says some employers have taken the opportunity to consolidate existing benefits in their flexible and total reward packages.

Administrative burden

“Where auto-enrolment has required the implementation of technology to minimise the administrative burden, it has made sense to put other existing benefits online to increase engagement,” says Gilbert. “This makes particular sense where salary sacrifice is involved, because the production of successive consolidated agreements is vital for the scheme to be effective.”

Others have moved to synchronise auto-enrolment with wider benefits windows or particular times of year. Bidgway says the Whitgift Foundation tends to have a lot of new starters at the beginning of the academic year in September, so it will be enrolling them ahead of its official October start date.

For employers that have yet to go through the process, it is the administration that emerges as the most cumbersome aspect. “The pensions part of auto-enrolment is relatively simple,” says Smith. “The difficult part is interpreting the legislation, making sure you comply with the regulations and the review of how the payroll system is structured. The costs and complexity of that are significant.”