Member Article

Auto enrolment: an introduction

This year will see one of the most far-reaching changes to UK pensions. From October 2012, new employers’ duties commence which will require employers to start automatically enrolling all eligible employees into a qualifying pension scheme. The duties will be staged in by employer size over the next few years, and apply to larger employers first. Given the relatively short timescales, it is important for employers in the North East to start pro-actively planning for the changes now.

Some employers could be tempted to see the Employers’ Duties as little more than putting in place a pension scheme and enrolling eligible individuals from their Staging date. The requirements are, however, much more complicated than this. The Duties apply differently to employees based on earnings and ages. Employers will, therefore, have to assess employees’ eligibility for automatic enrolment on an ongoing basis, which is likely to require changes to HR and payroll processes. In addition, periodic re-enrolment, the opt-out process and complex communications, mean the amount of time employers spend dealing with pension related issues is likely to increase significantly.

Where it is currently used, automatic enrolment is shown to lead to an increase in pension scheme membership as a result of employees’ inertia in not electing to opt-out. As a result, increased pension scheme membership will lead to higher staff costs for employers, unless savings can be made elsewhere.

Many employers do not fully appreciate the practical implications of complying with the new requirements and even many larger employers, to whom the Duties apply first, are not yet ready for automatic enrolment.

Although smaller employers’ staging dates may seem a long way off, their business may be impacted by automatic enrolment much earlier. Where small employers are competing in a labour market with larger employers, employee demand for pension provision, or alternative benefits, may increase.

Smaller employers should also be aware of how the Duties will impact on their staff costs in future years in both their recruitment policies and financial forecasts.Increases in costs as a result of the Duties should be treated like any other increase in the cost of providing goods or services. These costs should be considered in relation to staffing budgets for future periods and when entering into long-term contracts to provide goods or services.

Employers should also be prepared for strict regulatory change which will prohibit them from acting in a way that could induce employees to opt-out of automatic enrolment or treat employees detrimentally as a result of their pension scheme membership. The Pensions Regulator has been given a number of powers to act where employers do not comply with the Duties. These include up to two years’ imprisonment and fines for individual officers of companies. In addition, the Pensions Regulator has the power to issue compliance and contribution notices that require individuals or companies to take specific actions or pay contributions.

In order to comply with the Duties, it is likely that complex changes will have to be made to pensions, HR and payroll functions. Strong project management will be required to implement the changes that are required. If you do not implement the changes correctly you risk both regulatory action by the Pensions Regulator and damaging employee relations. To help you to make the changes correctly, it is important that businesses seek help from an adviser to look at the full range of changes that you need to make to your business processes.

This was posted in Bdaily's Members' News section by David Brown .