Whatâ€™s next for auto enrolment?
02 | INTRO 03 | READY TO RE-ENROL? 05 | INFOGRAPHIC 06 | COPING WITH CLIMBING CONTRIBUTIONS 08 | Q&A - BEST LAID SCHEMES 10 | JARGON BUSTER
WHAT’S NEXT FOR AUTO ENROLMENT?
Welcome Sage surveys the lay of the auto enrolment landscape
s you will no doubt be aware, auto enrolment has been around for almost five years now. This is, of course, the government initiative to make employers legally responsible for helping employees save for retirement. And, unless they actively choose to opt out, your employees should be enrolled in the scheme if they are aged between 22 and state pension age, earn more than £833 per month (£192 per week) and are working in the UK. Since its inception in October 2012, auto enrolment has been rolled out in a phased approach, with larger businesses being given an earlier staging date – the point from which an employer’s legal obligations come into effect – than smaller ones. The Pensions Regulator contacts all UK businesses to give them their staging dates, which vary from employer to employer depending on factors such as when each business was started or incorporated and how many employees it has. If you aren’t sure what your business’s staging date is, you can find out by visiting The Pensions Regulator website and entering your PAYE reference. Responsibilities of the employer According to a recent report by The Pensions Regulator, at least 92% of all employers are aware of their duties in relation to auto enrolment, with the majority claiming to have found them less onerous than they expected. However, it is worth recapping what
those duties are, as many employers can perceive them as being daunting to prepare for and time-consuming to implement. So being forewarned is often half the battle. How the auto enrolment landscape is changing
So what do employers need to be aware of as auto enrolment becomes business as usual? For starters, contributions are set to rise for both employers and employees. Businesses are, not surprisingly, concerned about the financial impact to their company but ensuring more money is available when employees retire is a huge step in the right direction. Employers need to consider the investment value that workplace pensions are bringing. The second thing to consider is re-enrolment, which is the next date in the auto enrolment calendar. Every three years employers must put certain staff into a pension scheme – carried out approximately three years after the business’s staging date. These ongoing tasks may not only make employers consider whether their current software solutions are sufficient to manage the processes but also provide an opportunity to look at whether the pension scheme they currently have in place is the best for employees. However, changing your software and processes can take a lot of time. So to get the best out of auto enrolment it’s important that you plan ahead.
Ready to re-enrol?
Three years have passed since many businesses’ staging dates for auto enrolment, meaning they’ll soon need to re-enrol certain employees into a pension scheme. But how can they ensure they’re ready?
IN 2012, THE EARLIEST adopters were required to automatically enrol certain staff into a pension scheme. Now, in 2017, we are coming full circle. The staging process dates have been reached and a large proportion of companies in the country have completed the process of inducting employees into auto enrolment pension schemes. In fact, we are now at a point where many employers are approaching the three-year anniversary of their original staging date, meaning that over the coming
months and years planning and executing re-enrolment projects is firmly on the radar of payroll departments throughout the country. In essence, re-enrolment is a process where companies must re-enrol certain staff into a pension scheme that can be used for auto enrolment, if they’re not already active members of one. Due to the nature of re-enrolment, this will be a first-time project in many payroll departments but it will come with definite timelines and penalties for non-compliance.
Your re-enrolment responsibilities Re-enrolment should be viewed in the same way as any other project your department undertakes. It will require you to make multiple decisions and different approaches can be taken to implement it based on your in-house resources, technology and service providers. At a macro level, re-enrolment can be divided into four work streams. Firstly, businesses need to identify when to engage in the re-enrolment process. Secondly, they need to identify the staff they need to enrol. Following this, companies need to complete the re-enrolment process, before finally declaring compliance with The Pension Regulator. In light of this, to successfully implement re-enrolment, it’s worth using project-management techniques like scheduling, resourcing and communication plans. Setting the date The first step in the plan is selecting the date of re-enrolment. You can choose any time from a maximum of three months before to three months after the third anniversary of your initial enrolment date. For example, if your staging date was June 1 2015, your six-month window would run from March 1 2018 to August 31 2018. When selecting your re-enrolment date, it is important to note that whatever date you choose this time will become the centre date of your six-month window next time around. Determining whom to re-enrol Going deeper into the preparation for re-enrolment, the next step is determining which employees need to be enrolled. Broadly speaking 3
WHAT’S NEXT FOR AUTO ENROLMENT?
to include and undertaking all the administration tasks of enrolment, communications and creating contributions for employers,” Watmore says. Again this decision has to be assessed from a perspective of the immediate outlay of paying a service provider versus the opportunity cost of doing this in-house.
Due to the nature of re-enrolment, this will be a first-time project in many payroll departments employees can be divided into three categories: needing to be re-enrolled, not needing to be enrolled and exempt. When planning for re-enrolment, sufficient time needs to be allocated for classifying your entire workforce into one of these categories. This is particularly important during your first re-enrolment project, as there is no benchmark in place for determining how long this task may take in your organisation. It’s also prudent to consider the cyclical nature of re-enrolment and what processes are being put in place within the organisation for the future. Re-enrolment will occur again in three years, so to approach each instance as efficiently as possible you need to document processes, create relevant checklists and take note of date requirements. This will help ensure that the next phase of
re-enrolment can be dealt with efficiently, even if the same staff or service providers are not used. At this point, you must also start communicating with the staff that need to be re-enrolled and inform them how reenrolment applies to them. The legislation requires this to be within six weeks of their re-enrolment date.
Completing re-enrolment Once you have determined which staff members it applies to, you have to go through the process of completing reenrolment. At this point in the process there are myriad ways to proceed, whether you complete the task in-house, outsource to a service provider or go through your payroll supplier. While there are a number of platforms that will help to automate the process, Steven Watmore, product owner for Sage 50 Payroll, advises you to look for the complete package. “The Sage Pension Module handles re-enrolment completely for you, advising you of your duties, helping you make decisions around the employees
Declaring compliance Once the re-enrolment process is complete, your compliance needs to be re-declared on The Pensions Regulator website to show you’ve complied with your legal requirements as an employer. This is a mandatory requirement even if no one in your organisation meets the criteria to re-enrol and it must be completed within five months of the three-year anniversary of your staging date. The detail required for the declaration can be found on the Pension Regulator website. Re-enrolment is different to any other payroll period so preparation is required to ensure its success. While it is a somewhat unique situation for payroll departments in the UK, it is one that comes with a clear set of requirements to ensure completion and compliance and that is strongly supported at governmental level. Given how different this initial re-enrolment period is to your standard payroll, applying some fundamental project-management techniques to ensure that schedules are met, milestones achieved and payroll teams adequately staffed can be the decisive factor in reenrolment success. To find out more about re-enrolment, click here.
Re-enrolment: your legal duty
staff back into a pension scheme.
What you need to do Re-enrolment and re-declaration is a legal duty and you could be fined if you don’t act.
Set your re-enrolment date Choose your re-enrolment date from within a six month window, which starts three months before the third anniversary of your automatic enrolment staging date and
Complete your re-declaration of compliance
You must do this within five months of the third anniversary of your auto enrolment staging date.
Assess your staff Duties vary on whether you have staff to reenrol or no staff to re-enrol.
TPR need notifying on how you’ve met your legal duties for re-enrolment by completing a re-declaration of compliance.
On your chosen re-enrolment date, you’ll need to assess certain staff to work out if you need to put them back into your pension scheme. You can get an to manage this for you and automate the admin tasks. Do this on your re-enrolment date
Write to staff who you have re-enrolled: TPR have templates available. Again this process can be managed through auto-enrolment communicating changes and updates to employees.
You’ll need to complete a redeclaration of compliance to tell TPR how you have met your duties.
Do this within six months of your re-enrolment date
Once you have re-enrolled your staff, you will have ongoing duties. Then every three years you’ll need to re-enrol certain staff again.
Eliminate the admin, find out more
WHATâ€™S NEXT FOR AUTO ENROLMENT?
Coping with climbing contributions With minimum pension contributions set to rise in 2018 and again in 2019, itâ€™s worth employers thinking about how they can reduce their budgetary burden and get the best deal for employees According to The Pension Regulator, 642,454 employers have enrolled their staff in pension schemes as of June 2017, with a total of 8,165,000 employees now having a workplace pension. However, the changes in the pension landscape are not yet finished, as over the next two years the total minimum contribution rates are set to rise to 8%, with minimum employer contributions rising to 3% and employee contributions set to leap to 5%. For employees, this will represent a jump of five times the current minimum by 2019.
Managing the impact of rising costs There is no doubt that one concern around auto enrolment has been the perceived impact it could have on business, both in terms of the direct financial costs but also indirect costs in terms of time and expertise. Increases are being felt by both corporations and SMEs alike, with rising pension costs being reported by Waitrose as a reason for its 17% decrease in pre-tax profits for 2016. With rises in minimum contributions now imminent, the impact is even more significant in the SME sector as businesses are under pressure to cover not only set-up costs but also monthly retainers for the management of pension schemes.
With this in mind, it is widely regarded that the investment required by pension phasing in terms of time and expertise is felt more by small businesses as larger companies have in-house teams managing the implementation of auto enrolment schemes. Although the original phasing dates have now been moved back, planning and understanding the effect these changes will have is critical in reducing any negative impact they may have on cash flow and cost management. Steven Watmore, product owner for Sage 50 Payroll, says: “The word ‘phasing’ is important in the terminology when it comes to cost reviews, as a lot of people we talk to don’t realise that the rise in 2018 isn’t a one off: there is also a significant jump in 2019 that a lot of people aren’t aware of.”
Regularly reviewing pension provisions With costs rising and these phasing dates looming, this is an ideal opportunity to review your pension provision. “If the cost of providing the pension is linked to the overall contribution values, there could be real benefit to employees in regularly reassessing the return on investment your provision offers,” explains Watmore. “Linking the review to a recurring date such as re-enrolment every three years may be a benefit but with minimum contribution rates seeing such significant uplift over the next few years, more regular reviews should also be undertaken.” A report published early in 2016 by Shareaction, the responsible investment charity, highlighted a significant gulf between the best and worst performing auto enrolment pension schemes when ranked on transparency, governance and responsible investment performance. Evidently not all pension schemes are created equal and
Adopting the final minimum contribution rates removes the need to actively manage pensions for the next two years performance needs to justify the cost. A review could well be advisable to ensure your scheme is performing in your business interests.
Getting ahead of rates rises One way in which businesses can minimise some of their administrative costs surrounding the looming increase in minimum contributions is by jumping to 2019 rates immediately rather than going through the phasing process. Opinion is divided amongst employers on the efficacy of this, with many arguing that there is a benefit in terms of the reduction of administration. Given that adopting
the final minimum contribution rates removes the need to actively manage pensions for the next two years, employers can essentially configure their scheme once and then leave it to its own devices until 2019. However, this has to be balanced against the increased upfront costs employers will face and whether they are yet in a position to absorb them. Discussing this jump, Baroness Ros Altmann, former minister of state for pensions, says: “I would not support going too quickly on the increased contributions, as employers and workers need time to become familiar with the idea of pension saving. The point of the staged approach is that the higher contributions will coincide with the increase in personal tax threshold, so higher pension contributions will not affect take home pay so much. There is, of course, nothing to stop employers paying more than the minimum required by auto enrolment and many already do.”
Reducing opt-out rates When planning how you’re going to up your contributions, reducing admin isn’t the only thing to consider. The latest data by the Pensions Policy Institute on the employee opt-out rate amongst those working for smaller employers has reached 17% in comparison to between 8% and 11% amongst larger ones. In order to keep these drop-out rates low, employers are exploring a number of options to ensure continued take up of pension schemes. And matching contributions – effectively upping employer contributions to 4% so that employees need only contribute 4% to meet the 8% total minimum contribution rate – are becoming the favoured tactic, as it brings benefits to both business and employees. As well as reducing the burden on employees, a key benefit of 4% matching is it brings a company’s pension scheme in line with those seen in bigger businesses. This enables small businesses to show a similar commitment to their employees. Salary sacrifice While matching contributions could prove costly for businesses, particularly those without a huge amount of capital to spare, there is one option that will help reduce the burden for employer and employee alike. Enabling employees to give up part of their salary in return for a higher pension contribution from their employer, salary sacrifice comes with the added benefit of lowering an employee’s taxable income, meaning they could potentially see no reduction – or even an increase – in their take-home pay as a result. However, before opting into a salary sacrifice, it is important to for employees to speak with a pension professional and make the decision in light of broader financial commitments such as mortgage applications. To find out more about re-enrolment, click here.
WHAT’S NEXT FOR AUTO ENROLMENT?
Best laid schemes Whether you want to prepare for the hike in minimum contribution rates or get ready for cyclical enrolment, Henry Tapper, the founder of Pension PlayPen, explains there’s never been a better time to start shopping around for a new pension scheme While many employers have now made the adjustment to auto enrolment, is there a benefit to shopping around for a new scheme? There is most definitely an advantage to shopping around. Pension schemes have improved greatly over time, driven by advances in technology and regulatory pressure to increase value for money. If you are with a pension provider that’s charging staff 0.57% plus a fixed fee to the employer for maintenance, it may well be you can improve the terms your staff are getting on their workplace pension by as much as 50%. By shopping around, you can reduce the cost your employees are paying. You could do this through a benefits consultant or through an online service such as Pension PlayPen at a much lower cost. You should also be able to reduce the costs you are incurring as an employer. Selecting the best pension could improve retirement outcomes by between 10% to 15%. Put another way, you could give your staff a lifetime pay rise of up to 15% per annum, just by getting a better workplace pension. Who wouldn’t want that kind of a pay rise in retirement? The Government Actuary’s Department has estimated just a 1% difference in the performance of your workplace pension is equal to 27% extra income in retirement. 8
What should employers look out for in their pension schemes to help them prepare for cyclical re-enrolment? Look at the terms your staff are getting is important: are they competitive? You should also look at your experience as an employer: is what you’re getting cutting edge? Sage is building a portfolio of providers all of whom can process auto enrolment at the press of a button. API technology doesn’t just make auto enrolment quicker, it also makes data safer. It may be worth checking out who is on their list if Sage are your software provider or if you are considering their solutions. You can look at changing your pension scheme at any time but you must start somewhere. Large employers tend to review their pension provider every three years so re-enrolment is a good time to review your scheme. You might think three years is a long time to wait but pensions play a long game. You should be cautious and not make kneejerk reactions when you feel dissatisfied with a provider. But that doesn’t mean to say you can’t look at the performance of your pension scheme more frequently. How can different pension schemes help employers prepare for the looming increases in minimum contribution rates? Employers should contact their workplace pension provider now for help. Most providers have given thought to this and have plenty of help on offer. This can include websites with tools to help staff look at the cost and benefits of the 2018 and 2019 contribution increases
and governance reports from their independent governance committees or trustee boards. Many will also offer a telephone helpline service and larger employers may get on-site faceto-face support. Most, if not all the above, should be free to use. It’s well worth asking the question about what is available. Will some schemes enable employers to make a single jump to the 2019 rates and how would this affect employers’ transition to the new rates? Some employers will choose to contribute at the 2019 rate as early as 2018. Providers are not geared to help – other than to receive higher than expected contributions. If you are looking to take this step, you should be speaking to an employee-benefits consultant or experienced independent finance advisor: there are costmitigators such as a salary sacrifice that can ease the shock of a jump from 2% to 8% of relevant earnings. How can different schemes help employers optimise their pension schemes to minimise opt-out rates?
How important is it for employers to continue to review and seek advice on the pension provisions they have in place? It will become increasingly important. There is a rule of thumb that when a pension pot is worth as much as a member’s car, it becomes important. And if it is important to a member, a workplace pension will be important to an employer. If the employer has been seen to have shown due diligence in the selection and governance of its pension then it will receive a positive return on investment. If an employer can’t show it has paid attention to pensions then the workplace pension can become a risk. In America, employers are regularly subject to class-action lawsuits from employees angry that they have not carried out their duty of care with regards to the workplace retirement plan. We have not yet seen this in the UK but with over one million employers due to have staged auto enrolment by the end of this year, it is very likely that we will see litigation on this side of the pond. Pension PlayPen helps employers to choose a good workplace pension and in the future it will help employers ensure their pension remains relevant, providing the right technology at the right price. To find out more about Pension PlayPen, click here.
There are two reasons employees will opt-out: either they can’t afford the contributions or they see better value in not paying them. Properly advertising your scheme using the services provided by your adviser or provider can help employees stick with their plan. However, the best help is the endorsement of auto enrolment by the employer themselves. Employers who have confidence in their workplace pension provider are more likely to promote their scheme and consequently have lower opt-out rates. Genuinely good providers will help employers to have this confidence.
WHAT’S NEXT FOR AUTO ENROLMENT?
AUTO ENROLMENT JARGON BUSTER It can be hard for the layman to make heads or tails of the jargon surrounding auto enrolment. Fortunately this handy jargon buster can help you learn the lingo Automatic enrolment
A type of work-based pension that automatically enrols anyone who qualifies for the scheme. Often shortened to ‘auto enrolment’.
A pension scheme that meets or exceeds the contribution or benefit levels set by the government.
Staging date Staging is the staggered introduction of auto enrolment and the date your duties start. You can check your staging date on The Pensions Regulator’s website. Assessment Under auto enrolment regulations you need to work out who to put into a pension scheme. On your staging date, you have to work out how much each of your employees earn and how old they are. This will identify what you need to do. Contributions Paying money into a pension scheme is known as ‘making contributions’. You must pay money into the pension scheme on a regular basis. Contributions will be made by both the employer and the employee. Defined contribution scheme You need to examine whether or not your existing scheme qualifies for auto enrolment according to the rules set by the Department for Work and Pensions.
Phasing The government has set a minimum level of contributions that has to be put into a Defined Contribution Scheme by employers and workers. This minimum amount increases over five years in a phased start until all UK employers meet their obligations. Earnings basis This describes which basis of the employee’s earnings are used for calculating pension contributions. Contributions can be based on the standard components of pay – salary, wages, commission, bonuses and overtime, as well as statutory pay for sickness, maternity, paternity and adoption. Alternatively, you can use other definitions of earnings – find out more on The Pensions Regulator’s website. Employee data This includes your employee details and pension contribution amounts. You can transfer employee data to The People’s Pension by uploading a file – either manually or transferred automatically through your payroll software if it supports this. Alternatively you may be able to key in the data by hand.
This is how often an employer pays their employees, for example weekly or monthly.
Employees working in the UK, above the age of 22 and below the state pension age earning more than £10,000 – a figure which will be reviewed every year. Employees meeting these criteria must be autoenrolled. Find out more about employee eligibility here.
Pay period Under auto enrolment rules, this is the period of time over which earnings are to be measured. For example, if an employee is paid weekly, the pay period would be one week and if they are paid monthly, the pay period would be one month. The minimum pay period is one week. To align with the pay frequency used to calculate PAYE and National Insurance contributions, the pay period can be a tax week or a tax month. Postponement If you have temporary employees, you may choose to delay working out who you need to put into a pension scheme. You can only postpone auto enrolment from your staging date, an employee’s first day of employment or the date an employee first becomes eligible for auto enrolment.
Non-eligible worker These are employees who are either aged 16 to 21 or over the state pension age of 74, working in the UK and earning above £10,000; or aged 16 to 74, working in the UK, earning above £5,722 a year but below £10,000 at the time of publishing. Noneligible workers have a right to opt into their employer’s pension scheme. Entitled worker These employees have the right to join the pension scheme if they wish, as long as they’re aged 16 to 74, working in the UK and earning below £5,772. The employer only has to make a contribution for entitled workers if it is part of their contract of employment.
Opt-out This is the responsibility of the employee and not the employer. It’s the process of an auto-enrolled employee choosing to halt contributions to a workplace pension scheme. Re-enrolment Every three years employers must automatically enrol eligible employees who have formerly opted out. It is up to the employee to once again opt out. Actuarial valuation Commonly refers to an investigation by an actuary into the ability of a benefit scheme – in this case a pension scheme – to meet its obligations. The purpose is usually to assess the funding level and contribution rate, based on the agreed valuation method and assumptions.