Steve Herbert of Jelf Employee Benefits advises employers how to set up a pension scheme from scratch, and to stay on the right side of the new Auto-Enrolment regulations in the process.
After years in the making, pension auto-enrolment duties are now finally upon UK employers.
Starting from October this year, and being phased in over the next half a decade, the legislation requires all UK employers to automatically enrol their eligible employees into a suitable pension scheme, and to contribute towards the employee’s pension savings. Other duties and requirements, such as record keeping, are also expected of the employer. Significant financial penalties can be levied for non-compliance.
Read our introduction to auto-enrolment to find out more about the requirements of this new legislation.
This legislation is heavily weighted against SMEs and startups given that smaller organisations do not have the luxury of financial scale, or physical resource, to commit to running a pension scheme. Indeed, this grouping may only have a limited knowledge of the corporate pensions market, so deciding what scheme to use to best meet their new duties will be a significant challenge in itself.
So how can the employer who is new to this area assess, and indeed access, the market to enable an informed decision to be made?
The following step-by-step guide should help employers in this position.
Step 1: Find your auto-enrolment date
Regardless of what scheme, or schemes, the employer ultimately uses, the principle driver for most will be to ensure that the new regulations are fully complied with. Originally it was intended that all employers would begin auto-enrolment in October 2012, but over the last few years the timeframe has been extended, and there is now more latitude for smaller businesses and start-ups.
Each employer will be allocated a ‘staging date’, and full compliance with the duties must take place no later than that date. It is however possible to bring the staging date forward to better fit with the employer’s business needs, for instance the business year or pay review date.
At the time of writing, and following some recent changes, the final list of staging dates has yet to be laid before parliament. However, the likely timetable can be viewed on The Pension Regulator’s (TPR) website.
Step 2: Assess the likely impact for your organisation
The next stage will be to assess what the likely financial and administrative impact of complying with auto-enrolment requirements will be for your organisation. Even if you are ultimately seeking to provide a more comprehensive pension offering than the legal requirements, it would be good practice to make sure that you first understand what your minimum duties are.
As mentioned earlier, the employer requirements are not purely that of enrolment and payment. The employer is required to continuously assess the workforce, and auto-enrol employees into pension membership as they become eligible. The employer also has duties for those that fall outside of the auto-enrolment process as well. All of these duties are time-constrained, and records will need to be maintained for up to 6 years.
Some organisations may require TPR’s more detailed guidance (which runs to over 200 pages!):
By the time you have completed this step of the process, you will have a good understanding of the numbers of employees likely to be enrolled into a pension scheme, and the legal minimum costs that this will entail for the company. Not only is this important information for business planning purposes, but this will also be extremely useful when you come to research the market in Step 6.
Step 3: Consider your workforce’s attitude to retirement savings
The next step is much more subjective, but is really key to any final decision you will make with regard to a company pension offering.
It is generally accepted that different groupings of employees will perceive the benefits of pension savings in different ways.
A younger, more transient, and/or low paid workforce are unlikely to be engaged with the concept of pension savings. Conversely an older, longer serving, and/or better paid workforce may see this as a pivotal part of their employment rights.
It’s important that the employer gauges how any pension offering is likely to be perceived. Put simply, there is no point the employer throwing extra money and resource at auto-enrolment if the end product will carry no additional attraction to the workforce. Which leads us nicely to...
Step 4: What is the employer seeking to achieve?
Some employers may find that their main drivers around auto-enrolment and pensions will be only to provide the legal minimum requirements, and to avoid any financial penalties.
Many others organisations are however viewing this differently.
The thinking goes that as compliance with auto-enrolment carries a cost, then it is perhaps better to use this spend wisely to produce some level of return, for instance in lower recruitment and retention costs.
If your organisation falls into the latter of these two groupings, and if the attitude of the workforce (see Step 3) is likely to make them engaged with a good pension offering, then there is certainly mileage in the consideration of a more robust offering than that prescribed by the legislation.
Step 5: What resources does the employer have?
If you are considering a wider pension offering, then it’s important to put something in place which will not adversely impact on your day-to-day operations.
Most modern Defined Contribution pension schemes can be administered on the internet, which significantly reduces the admin burden for the employer. It is however important that ownership of the pension scheme is assumed by an individual or department within the business to avoid the scheme falling into disrepair, or worse failing to comply with the regulations.
On the subject of resource, don’t forget that any employer pension contributions will also have to be allowed for in your business plans. One method of mitigating some of this cost may be to utilise a payment method known as Salary Sacrifice. If set up correctly, this can create a saving for the employer in the form of lower National Insurance contributions, which in turn can help meet some of the pension costs.
Step 6: Select a pension scheme
Many employers will already offer a pension scheme to some, or all, employees. Historic schemes are often uncompetitive when compared with their modern counterparts. As such a review of any existing scheme is generally recommended, as this may produce a more modern, cheaper, and more efficient scheme for both employer and employee.
It’s also worth pointing out that auto-enrolment regulations require enrolment to a scheme of a certain quality. Many existing schemes will not currently meet these standards, so this alone is a good reason for review.
In selecting a pension scheme it’s usually best to use an Employee Benefits Consultancy, as such organisations can access the best terms from across the marketplace, and can also include The National Employment Savings Trust (NEST) in their comparison.
If you decide on a scheme other than NEST, you may wish to ‘Certify’ that scheme. This will demonstrate that the scheme provides a contribution level at least as good as NEST’s, and will create some flexibility in the structure of the arrangement. It is also likely that a Certified scheme can be better used as a recruitment and retention tool than NEST.
Step 7: Don’t leave it until the last minute
Finally, and not least, don’t leave any decisions or actions too late.
Aside from the employer’s own duties, it should be remembered that some in the pensions market will struggle with the significant ‘spike’ in enrolment activity during the middle of this decade, and it’s therefore really important that your project is planned out well in advance.
To summarise. Compliance with auto-enrolment is a given, but the savvy employer may well benefit from a wider review of the options available in the pensions marketplace.