Compulsory auto-enrolment of staff into pension plans will not happen until 2012, but there are good reasons why employers should get ahead of the game, says Tom Washington
If you read nothing else, read this…
- It is possible to introduce auto-enrolment for trust-based occupational pension schemes, but not for contract-based schemes, such as group personal pensions, stakeholder plans or group Sipps.
- Employers can auto-enrol staff into contract-based schemes only by changing contracts of employment or by running pension seminars at which employees commit to be auto-enrolled.
- Employers could phase in the costs of auto-enrolment gradually, rather than seeing a sudden, steep rise in 2012.
For savvy employers, pre-empting the pensions changes due to come into effect in 2012 is a must to avoid any nasty surprises. Under the Pensions Act 2008, employers will have to auto-enrol staff into a workplace plan that meets particular new rules. Employers will also have to make a contribution that will rise to 3% over several years. For some employers, this will mean a sharp increase in costs, but the impact could be lessened by implementing auto-enrolment ahead of time.
At the moment, organisations that run a trust-based occupational pension scheme for staff can introduce auto-enrolment, but those with contract-based plans, such as group personal pensions (GPPs), group stakeholder schemes and group self-invested personal pensions (Sipps), cannot. This is because of two European directives, the Distance Marketing Directive and Unfair Commercial Practices Directive, aimed at preventing employees from being misled into signing up for financial services contracts without having full knowledge of what they are getting into.
Although the European Union has since agreed that auto-enrolment is consistent with these directives, the UK government remains unwilling to allow it for contract-based schemes until 2012. But Andrew Tully, senior pensions policy manager at Standard Life, thinks the government is missing a trick by not removing these restrictions. “We are trying to persuade the government that it should bring this forward and allow employers to do so from today as long as it is a scheme to which they are contributing,” he says. “Why miss this opportunity to increase pension provision today rather than wait a few years?” In fact, there are ways employers that operate contract-based schemes can auto-enrol staff now. One option is to change employees’ contracts of employment. This is far easier to do for new members of staff, who can sign a contract that includes a clause stating that they agree to be part of the pension scheme if they accept the job, with an opt-out period included. But this approach is less effective for existing staff, who may be concerned that their contract is being altered.
Law firm Linklaters introduced auto-enrolment for new employees in February this year, offering an opt-out period of 30 days from the date they join the company. David Jones, the firm’s reward manager, says the decision to auto-enrol new staff into the defined contribution scheme was designed to encourage higher take-up and to streamline administration for new staff. It was also intended to help future-proof the scheme ahead of 2012.
Starting the process early also means employers can phase in the costs of auto-enrolment at a rate that suits them. For example, they could enrol new joiners into a plan that has 1% employer and staff contributions, and graduate annual rise s, ensuring they meets the new requirements in a relatively painless manner.
“If an employer is doing nothing at the moment, in 2012 there will be a cliff edge that will see costs increase dramatically,” says Tully. “If an employer controls how and when people join, it can gradually smooth the costs over a three-year period.”
Employers could also tackle auto-enrolment via a pensions seminar, typically run by their scheme’s provider. This is designed to inform staff about the plan, but there would also be a register available for them to sign stating they agree to be enrolled into the pension scheme. This complies with the EU rules protecting staff from being put into a pension scheme of which they have no knowledge and which could worsen their financial position.
In March, the Department for Work and Pensions issued a consultation on the draft auto-enrolment regulations for 2012. But the draft appears complex and time-consuming for employers, especially those seeking to introduce auto-enrolment before 2012, says Jane Beverley, head of research at Punter Southall. The document states that, for contract-based schemes, new staff will have to receive basic information about the scheme within seven days of starting work. Within a further seven days, the employee must be enrolled into a qualifying scheme. For occupational plans, including the new personal accounts, the joining and information provision windows will both run for 14 days. “The regulations are highly technical and it will take quite a long time to introduce them in a way that meets the requirements in 2012,” says Beverley. “These are only draft regulations, so they may well change.
“Employers might want to wait until we have got more final regulations because they might introduce processes that are not convenient for them just because they are in the draft.”