If you read nothing else, read this …
• Complying with the 2008 Pensions Act could increase employers’ pension costs significantly, particularly if a large part of their workforce is not currently enrolled in a workplace pension.
• Employers must consider two basic costs: how much contributions will cost, and the price of implementing systems and processes to manage compliance with the reforms.
• Employers can use a number of factors to calculate the cost of complying, such as the number of eligible staff, likely opt-out rate and current staff turnover levels.
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Case study: Informa prepares for ‘significant’ hidden costs
Publishing and events company Informa, which has 3,200 staff in the UK, operates a three-month waiting period before employees can join its group personal pension (GPP) scheme, which is managed by Friends Life.
About 50% of its workforce belongs to the GPP, to which Informa makes a matching contribution of between 3% and 5% of qualifying earnings. Thomas Humphris, head office HR and UK reward director at Informa, says: “Our starting auto-enrolment date is 1 July 2013. We may bring that forward to 1 January 2013 because we do our flexible benefits processing in January. Employees have a flex window at the end of November and start of December.
“The big costs will stem from redesign and behind-the-scenes development, so we are processing and reporting properly and issuing alerts. It means making changes to the Vebnet benefits portal, our SAP HR system and payroll, which is handled by ADP. There will be significant hidden costs it will not be cheap. I reckon about £20,000 on development costs for the HR system alone.”
Informa will also use actuaries to calculate costed options.
The GPP operates via pensions salary sacrifice, so the company will offer another option for employees who do not want to take part in this or for whom it is not suitable, says Humphris.
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Employers that still do not have detailed plans in place for next year’s pension reforms could face a shock when they realise the costs involved, says John Charlton
This time next year, organisations with more than 120,000 employees will be obliged to enrol them into a pension scheme. Employers with 50,000 to 119,999 staff follow suit in November 2012, and smaller organisations will join the auto-enrolled ranks in stages. By October 2013, all employers with more than 800 staff will need to comply with auto-enrolment regulations, and it will be compulsory for both staff and employers to make contributions.
And a year is no time at all in pension planning, so employers need to get their costing and budgeting skates on.
There are two basic costs to consider: how much contributions will cost employers, and what the bill will be to set up systems and processes to handle auto-enrolment.
Provider Legal and General is advising 15 FTSE 100 companies and a number of medium-sized employers on auto-enrolment. Ian Mahoney, operations director at Legal and General, says the actions employers can take to predict costs include: calculating how many employees are eligible to join the scheme under auto-enrolment rules; estimating the likely opt-out rate; working out current staff turnover; finding out how many workers are on short-term contracts; and identifying any trends for staff moving into higher-tiered arrangements after an initial qualifying period.
Employers should be able to calculate contribution costs relatively easily, says Andrew Cheseldine, principal and defined contribution (DC) specialist at Lane, Clark and Peacock. “We have a model that can do it. [Employers] put in details of qualifying employees’ earnings, according to the bands and the costs of contributions, and the system spits out the results. The important variable is how many people will opt out.”
All eligible jobholders will have to be enrolled and contributions paid for them. Alan Morahan, principal adviser at Punter Southall, says: “Non-eligible jobholders do not have to be auto-enrolled, but can opt in. If they do, the employer has to contribute. Entitled workers do not have to be enrolled automatically and if they opt in, employer contributions do not have to be paid.”
Take-up rate
Cheseldine adds: “We auto-enrolled about 10,000 employees for [an organisation] in the financial services sector recently and got 88% take-up. I think a figure of about 80% staying in a scheme will apply across the board. Costs will also depend on the type of scheme, for example whether it is trust-based, or uses salary sacrifice. Very small employers will use the national employment savings trust (Nest).”
Cheseldine estimates the initial cost to employers will be 2% of total qualifying salaries, comprising 1.5% contributions and 0.5% administration costs.
Employers that use Nest may discover extra costs. Jamie Jenkins, head of workplace strategy at Standard Life, says: “The main additional cost would arise when the employer is using both a private pension provider and Nest. It will have to segment the employee data both joining and paying and then deal with two different providers with potentially different data requirements.”
Budgeting for implementation and administration costs will be trickier because there will be variations depending on employers’ record-keeping, whether they use third parties for payroll and other functions, and if they have high staff turnover, for example. Cheseldine says: “Employers with 500-plus staff are probably looking at 1% of salary costs to pay for administration.”
Payroll reconfiguration costs must also be assessed, says Lee Hollingsworth, head of defined contribution at Hymans Robertson. “We have seen examples of employers being quoted upwards of £500,000 by software providers to implement the changes.”
Pension planning firms have developed modelling tools to help employers calculate the cost of auto-enrolment. “While this consultative work will come at a cost, the employer should benefit from greater certainty on future costs, along with a clear timeline for implementation,” says Morahan.
Generally, cost containment will depend on the slickness of record-keeping systems, how well-oiled the HR machine is, the level of interfacing between in-house and third-party systems, and the timeliness of communicating key data, especially around joiners and leavers. Making these functions as efficient as possible should reduce auto-enrolment implementation and running costs.
Design interventions can also help to mitigate costs, says Hollingsworth. “These include salary sacrifice, but also how an employer structures its plan design. The one-size-fits-all design does not work under auto-enrolment. An employer should consider segmenting employees into different groups and pay different rates according to value.”
Salary sacrifice arrangement
Offering a salary sacrifice arrangement can bring savings in employer and employee national insurance contributions, but employers must be careful not to offer the scheme to staff who earn at, or close to, the national minimum wage because sacrificing a portion of their salary could take their take-home pay below the legal level.
Looking at the information flow that plots an employee’s journey through the payroll and benefits systems should also be a key activity before the implementation date. Attention to detail and careful planning can yield dividends. For example, the three-month qualifying period for auto-enrolment should be an action milestone. It would be pointless auto-enrolling a new employee before then because he or she could quit beforehand.
Employers could look to third-party specialists to handle as much of the auto-enrolment burden as is feasible. Cheseldine says: “They could achieve a saving of 0.5% of payroll, especially if they can get a provider to roll everything into an annual management charge. There will be some admin and communication costs and if employers have high staff turnover, that could be difficult.”
Of course, employers could save by cutting contribution costs if they currently contribute above the minimum levels required. “They may review contribution levels, especially if they are bringing in a significant percentage of new employees,” says Jenkins. “However, research suggests this type of levelling down will be minimal, and most employers will maintain, or even increase, contributions to meet statutory minimum levels.”
The Insight into auto-enrolment survey published by Standard Life in August, which surveyed 200 large employers, found 93% did not have firm plans in place to meet the pension reforms, 54% did not know when they would have their plans in place and 56% were undecided about contribution levels.
If so, many employers are heading into unknown costing and budgeting territory.
Who is eligible for auto-enrolment?
Employers will have to identify how many employees they have in the three categories specified in the pensions reform legislation. These are:
• An eligible jobholder aged between 22 and the state pension age (SPA) with earnings above the earnings trigger for auto-enrolment.
• A non-eligible jobholder aged between 16 and 22 or over the SPA but under 75 and with qualifying earnings.
• An entitled worker aged between 16 and 75 but earning below the lower limit for qualifying earnings.
Read more about the 2012 pension reforms