Pensions auto-enrolment: how are employers preparing?

Author: Adam Geldman

Statutory automatic enrolment for eligible workers into a qualifying pension scheme will be introduced from October 2012. Employers face what can appear to be a bewildering array of decisions to ensure that they comply with the law. We review the steps that organisations are taking to meet their legal obligations.

Key points

  • Cost is likely to be a key factor when employers decide whether to pitch pension contributions in line with the statutory minimum or to be more generous.
  • Organisations that have taken on staff as a result of a TUPE transfer may have to administer more than one scheme, each conferring different contractual rights and obligations.
  • Not-for-profit organisations may find themselves squeezed by both lower revenue as a result of cuts in public spending and higher pension costs.
  • Our survey of auto-enrolment intentions reveals that employers have taken a variety of steps to meet their statutory duties, including attending seminars and establishing project groups. However, it appears that workforce consultation is less common.

October 2012 will see what is arguably the biggest ever shake-up of occupational pensions in the UK. The principle behind auto-enrolment is simple: employees are not saving enough to provide them with a decent standard of living on retirement. Therefore, they will automatically be admitted to an occupational pension scheme unless they actively take the decision to opt out.

However, underlying this are a whole host of complexities that reward specialists are grappling with, ranging from workforce communication exercises to the costs associated with compulsory employee participation in an occupational pension scheme. Some employers are faced with having to introduce, and then run, a workplace scheme for the first time, in order to meet their legal obligations.

XpertHR talked to Southdown Housing Association about its hopes and fears regarding auto-enrolment, and the steps it is taking to ensure that things run smoothly as its staging date approaches. We also review the findings of our annual survey of benefits and allowances, which included a number of auto-enrolment questions.

Southdown Housing Association's preparations

Southdown Housing Association is a specialist, not-for-profit provider of support and housing for vulnerable people in Sussex. It employs 800 staff and has an annual turnover of approximately £22 million, with the majority of this generated by either service-users' rents or from local authority and NHS contracts. Three-quarters of its income is spent on labour costs.

The majority of Southdown's employees are front-line workers providing accommodation for, and assistance to, people with learning disabilities. Others provide community-based services such as homelessness prevention and specialist employment support.

XpertHR talked to Vikki Hayward-Cripps, the association's executive director (business), about Southdown's plans for pensions auto-enrolment.

The organisation's anticipated staging date is October 2013 and it started preparing in 2010, as it normally works on a financial planning horizon of between five and 10 years. Hayward-Cripps says that auto-enrolment is bound to have a major financial impact on the association as it comes at a time when public-sector spending is being squeezed, with a likely knock-on effect on Southdown's income in the coming years.

Matching contributions

The association operates a money-purchase group personal pension (GPP) scheme, membership of which staff can choose to opt in to. Prior to auto-enrolment, Southdown's employer contributions for new recruits were pitched at either 4% or 5% of salary. In addition, after five years' scheme membership, the association matched employee contributions up to a maximum of 10% of salary.

The fact that fewer than one-third of Southdown's workforce are GPP members (primarily, Hayward-Cripps says, because the majority are on relatively low pay) meant that it was facing a considerable increase in payroll costs if, as the association anticipated, membership density increased to around 90% following auto-enrolment.

This being the case, as an initial step, in 2010 the association decided to limit its pension scheme contributions from 2011 to a maximum of 5% of salary for all new recruits, effectively removing the service-related matching element. This change also applied to those employees who had not, at that point, elected to join the scheme.

Participation rates to rise

Hayward-Cripps says that the association's employees, by the very nature of their work ("altruistic and client-focused"), tend to be averse to filling in more personal forms than are necessary to do their jobs effectively. "This means that, once auto-enrolled, they are unlikely to take an active decision to opt out, particularly as this would involve the completion of additional paperwork. We forecast this is likely to push scheme participation levels over the 90% mark.

"We could have auto-enrolled employees into the existing GPP scheme on the pre-2011 terms but we found that, after modelling the financial implications, this would simply have been unaffordable," she adds.

Southdown produced detailed forecasts based on various different assumptions including:

  • a 90% membership level with contributions capped at a maximum of 5% of salary;
  • a 3% employer contribution rate from October 2013 instead of October 2018; and
  • combined employer and employee contribution rates set at the statutory minimum for each of the contribution phasing dates.

"The other problem we faced was that scheme members were also offered both death-in-service benefits and permanent health insurance free of charge, which would have pushed up costs even further had we chosen to extend this provision to all auto-enrolled employees," Hayward-Cripps says.

The various add-on benefits were then factored into the association's calculations, as were different turnover projections.

"It soon became apparent that we could not afford a pension scheme with a membership density of 90% and employer contributions as high as 5% of salary, together with death-in-service and other ancillary benefits. We also knew that we could not fund a scheme based on a 5% contribution level without the provision of additional benefits. Even a membership density of 90% with a 3% contribution rate payable from October 2013 would be beyond our reach," said Hayward-Cripps.

Making savings

Southdown's room for manoeuvre was narrowing. Last year, the association decided to consult with staff on a number of proposals, which would be applicable only to new recruits, to deal with the situation. These included some or all of:

  • an increase in the working week by two hours to 39 hours without an increase in pay;
  • a cut in sick pay;
  • reduced holiday entitlement; and
  • a salary cut.

In the end, employees agreed to the introduction of lower starting salaries (by approximately 4.6%) for new recruits, effective from 1 April 2011, compared with those paid to existing staff. Hayward-Cripps says that the workforce was fully aware of the financial problems facing the association and so was minded to accept its proposals, particularly as they did not affect those employees already in post.

Southdown estimated that, with anticipated employee-turnover levels; lower starting salaries; the deletion of the top point of the four-point incremental pay scale for one operational group; together with the removal of death-in-service and other scheme benefits from new joiners after auto-enrolment, it would save enough to afford a 3% employer contribution from October 2017 instead of 2018 as required by law.

For staff recruited prior to its staging date (in October 2013), the association plans to continue to match employee contributions up to a maximum of 5%, probably with the existing additional benefits such as permanent health insurance (PHI). However, Hayward-Cripps says that this is not set in stone: "As the situation is changing rapidly, we are revising our projections every six months or so because the anticipated actuarial cost of provision keeps changing. Our final contribution phasing date has been delayed from 2017 to 2018. We are tracking what the costs and options for reduced additional insurance benefits might be as well as the pros and cons of running a scheme at different auto-enrolment 'tiers' - for example, just basic salary, or all pay, being pensionable."

Despite this seemingly never-ending task, Hayward-Cripps says that modelling has been a useful exercise, not only to deal with the implications of auto-enrolment but also to prepare for any possible reductions in contract income as a result of public spending cuts.

"We know that recruitment is not an issue for us, particularly in the current economic climate, because there are fewer jobs around and it is an employers' market. In addition, when people are thinking of a career change, moving to the not-for-profit sector can be an attractive option as it provides prospective employees with the opportunity to give something back to society. Based on these broad assumptions, we predicted that lower starting salaries would not stop us recruiting the calibre of staff we need."

Pension scheme administration

Southdown is in negotiation with its existing independent pension adviser/broker to administer auto-enrolment on the basis that the intermediary will receive a commission from a pension scheme provider for each new starter who does not opt out of auto-enrolled membership. This means that there will be no administrative costs borne by either the association or its employees. The "within-scheme" management fee for current members is 0.85% and it is planned that a new scheme will not cost any more than that - and so is likely to be less than the costs to individuals of a National Employment Savings Trust (Nest) scheme. This is one of the reasons why, when the organisation started looking at potential pension schemes some 18 months ago, it rejected the Nest option.

Hayward-Cripps says that, because there are new providers continually entering the auto-enrolment market, the association now has more options and it is seeking a scheme that will best be able to cater for a substantial number of employees on relatively low incomes. The willingness of firms to provide such a service, she says, is likely to depend on whether or not they can make sufficient profits, given the likely administrative costs.

"We are nearly there," says Hayward-Cripps. "The plan is to stick with our existing broker and together we will choose a provider able to meet the particular needs of our workforce."

Employee communications

The association says that its workforce has some general, albeit limited, understanding of auto-enrolment and its implications, particularly those employees who are not members of the existing pension scheme. Southdown has already communicated directly with these staff and plans to do so again as the 2013 staging date approaches.

When asked whether or not the association is generally in favour of auto-enrolment Hayward-Cripps says that there are pros and cons: "On the one hand, in terms of a national strategy, the Government needed to do something to address the pensions issue, and that should be applauded. However, the impact on individual organisations and businesses varies according to their circumstances. We rely heavily on the public sector for our income, but many of the organisations we work with are seemingly unaware of auto-enrolment and the financial impact it will have on not-for-profit employers such as ourselves.

"Many public-sector bodies looking to place contracts are unaffected by the Pensions Act and so they don't understand the additional pressures we are facing. We have been trying to raise the subject when tendering for work, particularly in relation to contracts that have a three-year lifespan, because in the third year there are going to be additional costs due to auto-enrolment and we have taken the decision to include these in all our bids. However, we cannot be sure that our competitors have factored this in to their tenders. If they have not, but win on price, they are going to face severe problems in the latter years of the contract. When this becomes apparent it will be too late for us because we would have already lost the work," Hayward-Cripps says.

Public spending cuts

Southdown says its biggest problem is that the introduction of auto-enrolment coincides with a severe squeeze on public spending, and hence projected income. "It has been difficult for us to prepare for both at the same time. It would have been tempting, because two years ago 2013 seemed a long way off, to put planning for auto-enrolment on the back-burner, but I think this would have been a mistake.

"While we like to share information with other employers in the not-for-profit sector, we have to be aware that they are, in effect, competing with us to secure contracts. This means that the Government's suggestion that we work together on a collaborative basis is all well and good in theory, but is more difficult in practice," Hayward-Cripps explains.

The picture is further complicated, she adds, because a number of contracts it has won involved the TUPE transfer of staff from the public sector. These employees bring with them pension entitlements which, in all cases, are more generous than those offered by the association to its existing staff. This will not only add further costs to the organisation's pension bill, it will also lead to a discrepancy in potential benefits between former public-sector workers in final-salary schemes who transferred to the association, and employees on Southdown terms and conditions.

Hayward-Cripps says that the organisation has taken a proactive approach to auto-enrolment to ensure that it keeps up to date with legislative requirements. "Our position would be far more difficult if we had buried our heads in the sand," she says. "I think we have, as an organisation, done as much as possible. In fact, I am not aware of any other not-for-profit employer that has done as much detailed preparation as we have.

"We keep reworking the figures and adjusting the projections as we move towards our staging date. This is particularly important because, if labour turnover slows and my assumptions prove to be wrong, the savings we are banking on will not materialise. As a result, all our calculations will be wide of the mark and we will be facing far higher pensions costs than we originally anticipated."

Benefits and allowances survey

XpertHR's benefits and allowances survey 2012 included questions regarding 356 employers' auto-enrolment intentions and a selection of their responses are summarised in table 1 below.

It is clear from survey participants that, in advance of the first staging date of October 2012, some employers have been noticeably more active than others. Certainly, a number of respondents have already completed their preparations.

The staging dates as set out in the legislation are those by which organisations have to take the required action. However, there is nothing to prevent them meeting their obligations in advance, and respondents such as ELM HR and Le Creuset UK have chosen to do so.

Another group of organisations has yet to take any action on auto-enrolment. This apparent lack of activity may be connected to the fact that they regard their staging date as being some way off. For example, one services-sector employer said it has yet to consider this issue as it "does not affect our organisation until 2015". The fact that employers with initial staging dates some way down the track are smaller in terms of workforce size, and so perhaps lacking the resources that are available to their larger counterparts, may add to this inertia.

However, as we have seen from the Southdown Housing Association's experience, there is a counter view that it is never too early to prepare.

Preparing for pensions auto-enrolment

 
 

Many employers for whom Unison's community and voluntary members work are using Nest as a reason to reduce their pension provision down to the statutory minimum.

Unison

 

Many surveyed organisations are well prepared by virtue of the fact that they already automatically enrol all employees into an occupational pension scheme that at least meets the statutory requirements and, in many cases, exceeds them. In several instances, their key administrative task has been to lay the groundwork for bringing employees who have opted out of their existing arrangements back in to the fold by the relevant staging date, before giving them the chance to opt out again as required by law.

In terms of action already taken, many organisations, such as West Lothian College, have sought information from external sources by, for example, attending seminars. Others have sought the help of their existing pension and payroll providers. Maginus Software Solutions has given all staff access to independent financial advice.

Other steps taken by surveyed employers include:

  • modelling the cost implications;
  • establishing an auto-enrolment project group;
  • taking the opportunity to conduct a comprehensive review of pension provision;
  • planning to reduce employer contributions and, in some cases, cutting back pension-related benefits such as PHI and death-in-service cover;
  • integrating auto-enrolment in to an existing flexible-benefits scheme; and
  • discussing the issue with other similar and/or local employers.

Consultation is rare

 
 

The framework being implemented falls short of what we would like to have seen, most notably in respect of the level of employer contributions.

Unite

 

Relatively few respondents specifically stated that they had communicated with their employees regarding auto-enrolment and only three said that they had consulted, either formally or informally, with the workforce. This is despite the fact that trade unions have taken a keen interest in pensions. Unite, for example, has issued auto-enrolment briefings for members.

While the union states that it supports the principle of auto-enrolment on the basis that it requires all employers to contribute to their employees' pensions, it says: "The framework being implemented falls short of what we would like to have seen, most notably in respect of the level of employer contributions... Our target is to seek improvements such that we reach a position where employers are obliged to pay at least double what employees pay, as only on that basis do we believe that lower-paid workers have any chance of achieving a decent standard of pension."

Unison, which has a strong presence in the community and voluntary sector and has also been active in the recent public-sector pensions dispute, has criticised the Nest scheme: "The minimum level of employer contributions ... have been set at a very low level, and the pension is not guaranteed - the member, not the employer, bears all of the risk around how well investments do and the cost of buying a pension when the member retires. This means that many employers for whom Unison's community and voluntary members work are using Nest as a reason to reduce their pension provision down to the statutory minimum."

Table 1: Action taken to prepare for pensions auto-enrolment

Manufacturing and production
Organisation Employee nos Action taken
3M United Kingdom 3,200 "Our staging date is in 2013, but we have started communicating with employees who are not currently in any scheme. The intention is to auto-enrol all non-enrolled workers in to our defined-contribution (DC) scheme with a minimum contribution."
Arla Foods 2,700 "Have designed scheme meeting minimum legislative requirements. Have also closed defined-benefit (DB) schemes to future accrual to fund auto-enrolment cost."
Bosch Rexroth, Scotland 405 "At latter stages of full review of pension scheme criteria. Major changes to contribution rates, administration of auto-enrolment and opt-outs anticipated."
Hallmark Cards 2,500 "Re-designed and launched new DC scheme. Set up working group and engaged external consultant."
Orangebox 213 "None as staging date is not for several years. We are aware of the need for planning and meeting arranged with our pensions adviser."
Pelican 165 "Staff made aware of future requirements and have asked them to increase their voluntary contributions in advance of our 2013 staging date."
SSTL 450 "Not taken any action yet."
Private-sector services
Organisation Employee nos Action taken
Ageas 5,600 "Still working through implications. Have drawn up business case for external consultancy support. Need to understand the legislative detail and see how we can mitigate some of the costs by, for example, moving from a non-contributory to contributory scheme."
Anthony Nolan

230 "Our GPP scheme has phased contribution increases which will ensure it meets the statutory minimum contributions. Currently 70% of staff in the scheme. We will communicate nearer our 2014 staging date."
Break Charity

460 "We are aware of staging date and are discussing with our pension provider and staff consultative group."
Broadland Housing Group 237 "We have attended numerous seminars and conferences. Also working with our payroll provider."
Central & Cecil

543 "We are reviewing all our pension schemes and will be consulting on reducing employer contributions prior to auto-enrolment. Considering closing DB schemes."
Charles River 650 "Discussing the issue with our pension providers and putting together a project team."
Childbase 1,400 "Employees have been aware of auto-enrolment for the last two years. It is covered at inductions and employee representative meetings. We recently changed pension providers. Costs have also been taken account of in our five-year budgeting strategy."
City West Housing Trust 435 "Two options are being considered: use scheme provided by our career-average pension provider or the cheaper Nest."
Deminos 10 "Does not affect our organisation until 2015."
Francis Clark LLP 350 "None required as existing scheme offers superior benefits."
Golding Homes 126 "We are looking at introducing a DC scheme for new starters and closing our DB scheme to them. The DC scheme will be the auto-enrolment vehicle."
Jewish Care 1,200 "Currently modelling options and drafted a proposal to be discussed by the board. Will probably register current scheme and stick with matched contributions of 4% of basic pay where it is more than 85% of total earnings."
Maginus Software Solutions 102 "Brief auto-enrolment presentation to those not in pension scheme. All employees have access to independent financial advice."
Matalan 16,000 "We will be introducing GPP scheme for managers and offering Nest to all other employees. Want to have this ready by November 2012 to do full testing in time for our March 2013 staging date."
Medair UK 5 "All current and new employees auto-enrolled into Nest unless opting out and choosing to have contributions paid into personal pension scheme of their choice."
NMSI Enterprises 550 "Modelled cost implications based on assumption that everyone will be in scheme."
Personal Touch Financial Services 220 "Aware of the regulations and have already changed pension scheme and processes (and revised budgets) to ensure compliance even though staging date is not until 2014."
Richmond Housing Partnership 239 "Personalised communication to encourage non-members to join. Opened a lower cost DC scheme two years ago to encourage participation."
SCIE 80 "As staging date is in 2014 we have only started background reading."
Science Museum Group 1,150 "Have modelled potential costs and are awaiting further guidance from civil service on approach to take."
Telefonica UK 12,000 "We plan to incorporate auto-enrolment into flexible benefits package."
Toolbank 569 "Moving to GPP scheme, with reduced employer contributions. Pension-related benefits such as life and PHI cover restricted."
YMCA London South West 400 "Obtaining information at present. Will be collecting and collating payroll data to assess who to auto-enrol."
Public sector
Organisation Employee nos Action taken
Derbyshire County Council 33,000 "Held consultation meetings with payroll staff and other district and borough councils."

Essex County Council 40,000 "Scheme already auto-enrols, but opted-out employees will all have to be auto-enrolled again."
West Lothian College 340 "Attended seminars; taken advice from pension providers; and have had dialogue with payroll providers."
Source: XpertHR.