We hear many of the same concerns about auto enrolment being raised on a regular basis in our discussions with employers of all sizes. So you’re not alone with your auto enrolment concerns. That’s why we’ve addressed ten of the biggest headaches and their remedies below.
1: An administrative nightmare
Get all the help you can before the staging date. Employers can lighten the load by partnering with providers that will do much of the work for them. Some pension providers have invested in technology that can automate the administration of auto enrolment. This includes assessing which sort of scheme is most suitable for your workforce, working out which employees need to be automatically enrolled and calculating contributions and issuing communications to your employees based on the outputs of the assessment.
Once a clear process is up and running, administering auto enrolment is relatively easy – but to get to that point organisations need to put the right systems in place. That means selecting your implementation partners, establishing who is responsible for which parts of the process and ensuring clear access to your HR and payroll data. A robust project plan is essential.
2: Will payroll be able to cope?
A strategic decision is necessary to decide on whether payroll will handle employee categorisation ensuring that your auto enrolment obligations are met compliantly or whether your pension provider will do this. Larger payroll providers and pension providers such as ourselves have the capability to create a record to demonstrate to the Pension Regulator that you have fully complied with your auto enrolment obligations.
3: A Communications challenge
Employees find pensions complicated, and for many individuals an auto enrolment pension will be the first long-term savings product they have ever held. So simplicity is crucial.
Research has shown that messages work best when they speak to employees in a language they understand, through a medium via which they like to be communicated. Messages delivered in the run-up to auto enrolment are particularly important as they will set the agenda for the entire project. So think about what will work best for your workforce. A wealth of compliant communication material that can be tailored to the needs of your workforce is available at no cost from quality pension providers.
4: Future liabilities
The Pensions Regulator enforces compliance with the auto enrolment rules, and one of its top priorities is ensuring employers do not encourage or put pressure on employees to opt out of the pension scheme after they have been automatically enrolled into it. It will be scrutinising employers that have unusually high opt-out rates. Employers that persistently break the rules by inducing staff to opt-out can be fined up to £10,000 a day. The Pensions Regulator is hoping whistleblowers will report it of breaches of auto enrolment regulations.
Using compliant communication materials can alleviate the risk of regulatory action. Employers that use pension providers with auto enrolment middleware will also have a report that demonstrates to the Pensions Regulator that auto enrolment obligations have been fulfilled, although it will only be as accurate as the information given by the employer.
5: What is ‘middleware’?
Middleware is software that glues different IT systems together. In the context of auto enrolment, that means analysing the age and salary data of your workforce, working out the earnings upon which contributions are based, taking deductions through payroll and paying them over to the pension provider.
For auto enrolment to run smoothly both your payroll and pensions departments need to talk to each other. Unfortunately the fact that auto enrolment crosses both areas can lead to confusion over who is responsible for what part of the process. This is best addressed by assigning auto enrolment to a corporate sponsor high enough up in your organisation to ensure that responsibility for tasks is clearly apportioned, and delegating someone to be involved through the implementation project phase and beyond.
7: Existing Schemes
This will depend on the sort of scheme you have and how you decide to include your current non-pensioned staff. If your existing scheme already complies with the minimum criteria set for auto enrolment, which relate to contribution rates, charges and default funds, then staff already in it will see no change.
You will need to make some important decisions about how you design your pension offering for the rest of your staff. Do you want a single scheme for everyone in the organisation? Do you want a multifaceted scheme for your senior staff and a more basic scheme for other tiers of your workforce? You may choose to preserve your existing scheme for those already in it, while automatically enrolling those not currently in it into a new scheme. Independent Financial Advisers or Employee Benefit Consultants can provide information and advice in exchange for a fee or Providers like NOW: Pensions can help you to analyse your workforce and provide suggestions based on our previous experience.
Many employees will have never invested this way before in their lives. Poor performance will not only create disgruntled employees – it will also leave some staff with pensions so low they cannot afford to retire when they get older. So choosing the right default investment fund is crucial for an employer.
The performance of different pension providers’ default funds varies hugely. Pensions are long-term savings vehicles which means that even very small increases in performance can make a significant difference. For example, over a 40-year investment, an annual return of 7% will deliver a fund 30% higher than one achieving 6%.
Look for a default fund with a proven track record, one that has delivered stable returns over a long period of time and in different market conditions, and is unlikely to have changed as this may increase the associated communication costs with your employees.
9: Value for money
Charges are one of the biggest factors in determining how much pension employees ultimately receive. Sadly, pensions that charges as much as 1.5% of the fund value each year are common in the UK. We charge just 0.3% of fund value plus a monthly £1.50
admin fee (£0.30 for low earners during the initial phasing process). For a 25-year-old earning £26,000 saving 8% of salary for 40 years, that can mean the difference between building up a pot of £716,000 rather than the £547,000* generated in a scheme charging 1.5%. Our low charge scheme gives the saver in this example 30% more pension for exactly the same contributions. It may sound hard to believe, but the more expensive provider takes an extra £169,000 in charges out of the saver’s pot.
*Assumes salary increases by 4% a year, fund increases by 7% a year.
10: What will it cost me?
The overall cost of auto enrolment will depend on where you go for your pension and what you need from your pension.
Costs not only include fees and charges but also, human resources and administration so it is important to bear the overall cost in mind when choosing a pension provider. With NOW: Pensions, the employer can either choose to pay nothing in the way of administration with the fees coming from the members or you may choose to pay these fees for your members (employees); on-going costs such as communications are minimal and there are no set-up fees.
It is important to get your provider right from the start as changing further down the line will incur many additional costs.
At NOW: Pensions we believe everyone deserves a better pension.