ne benefit of staged auto-enrolment (AE) implementation is that small and medium-sized enterprises (SME) can benefit from the lessons learned by those employers whose staging date has already passed.
In this alerter we set out the 10 top issues we have met when implementing AE with our clients and suggest how you can deal with them in your business.
- Have you got a provider?
Employers need to put in place their AE solution on their staging date. Due to the way that staging dates have been set, most employers will become subject to AE over the next few months. Many providers that have been helping earlier AE implementations are likely to be overwhelmed by the number of employers needing AE solutions at short notice. Alternatively they may simply not be taking on new business as they've reached capacity. Colloquially the industry is referring to this as the "capacity crunch".
How do you deal with this?
Check which providers best suit your needs to find out what they can offer you and whether they have capacity. If you cannot use a preferred provider you can contact the National Employment Savings Trust (NEST). NEST has a public service obligation to take on any employer that has not been able to find an alternative provider, and is designed to provide a scheme that is AE compliant.
Previously NEST has been hamstrung in competing with the other solutions available due to limits the Department for Work and Pensions (DWP) put in place on what it could offer to avoid European competition issues. Many of these limits will be lifted in October 2013 and NEST has recently simplified its website to help SMEs with AE. However there are still issues with using NEST that you should consider to confirm whether these will impact on your business. In particular, NEST does not offer a software solution to assess AE for your workforce. If your existing HR software cannot do this you will need to look to use a middleware solution to allow you to identify who exactly you need to autoenrol.
- Are you comfortable setting up auto-enrolment solution yourself or will you need advice to make sure you meet your duties?
The first point is that AE is complex. The simple idea that workers should be encouraged to save for their retirement by AE and be helped with an employer contribution has turned into several hundred pages of legislation and guidance. All of which is subject to potential future legislative change or a gamechanging court case.
There are some elements of AE that are common sense. If your staff are on standard contracts, you have a provider that can provide support to you through the process, and you have tested that your HR systems can apportion your workforce into the AE categories, then your legal advice needs are probably low.
There are many helpful guides on AE – in particular the Pensions Regulator (Regulator) has guidance on meeting your obligations, which is available at www.thepensionsregulator.gov.uk /automatic-enrolment.aspx.
You should look over these to decide where you might need help. You can get advice from lawyers, benefits consultants or pension providers to cover any gaps in your company's capabilities.
- Do you have entrenched pension terms in employment contracts?
It is possible to change staff contracts to remove entrenched pension terms – for example, membership of a specific scheme, or an entitlement to a fixed pension contribution. This will normally involve consultation under the information and consultation regulations (ICER) for 45 days and may also involve a pension consultation for a parallel 60 days.
Under ICER if you get staff agreement to the changes during the consultation the contracts can be changed. But if you have dissenters who do not agree the change you may have to dismiss and re-engage them. The pension consultation issue is less flexible in terms of timing as the 60-day consultation is mandatory, but there is no requirement to do any more than consider comments made during the consultation before making your decision.
It is important to note that the AE requirements will apply to you even where there are contractual issues with auto-enrolling staff into a qualifying scheme.
- Union issues: Are your staff unionised?
If your have a unionised workforce, the union can provide a useful sounding block for your proposed changes. You will need to consider the terms and conditions of any collective agreements or promises made with the union. We have found that clear communication on the proposed changes and the reasons behind them is vital to making AE implementation as painless as possible.
You will probably need to consult with any recognised union on contractual changes, or for any pensions consultation so the earlier you complete the ground work the better.
- Are you replacing an existing trust-based scheme with a contractual scheme?
Many clients have been using AE as an opportunity to update and simplify legacy pension terms. A popular choice for AE is a contractual group personal pension with a pension provider to replace an existing trust-based scheme partly to avoid the administrative burden such a scheme represents.
Under pensions legislation closing down an existing pension scheme can be expensive and time consuming, even for a defined contribution scheme. If you have a defined benefit scheme, stopping accrual and moving to a contractual pension arrangement can trigger a "section 75" buy-out debt.
You will need to consider what sort of scheme you have and the way in which it can wind up and review the scheme provisions to ensure there are no hidden traps that make this very expensive.
- Are you increasing employee contributions as part of your AE strategy?
If you are proposing to increase employee contributions you will first need to complete a 60-day pension consultation. You will need to provide enough information on the change and the reasons behind it for a meaningful discussion with your employees and consider their responses before you go ahead with any changes.
If you are already making an employer contribution that is higher than the required AE contributions you will not be able to increase member contributions without changing the contract or term on which the higher entitlement is based.
- Have you got an agreement with an existing provider setting out minimum contribution levels?
The Regulator has stated that it expects an enforceable agreement between the pension provider and the employer to be in place in an AE-compliant pension scheme setting out that as a minimum the AE minimum contribution levels will be paid.
For most occupational pension schemes this will not be a problem. The governing trust deed and rules will set out the level of employer and employee contributions and all that will need to be done is to confirm whether the definition of pensionable salary in the scheme is identical to that in the AE legislation. Failing this it should be possible to use the alternative certification method to achieve compliance.
However, most group personal pensions (GPPs) do not have an agreement between the employer and the provider on the level of contributions used for the scheme. This is because, other than setting out basic administration and processes, the agreement between the employer and the provider tends to be relatively unimportant to the day-to-day contract between the provider and the employee.
Most GPP providers that are offering AE solutions are aware of this requirement and include appropriate wording in the administration and costs contract. You should check that an agreement on minimum contribution levels is in the contract if you use a GPP for auto-enrolment.
- How are you going to monitor your default fund?
The default fund of a defined contribution scheme is the investment fund that the employees' money goes into if they do not make a choice to invest in a specific fund. It is a requirement of AE that the scheme provided by the employer should have a default fund – as otherwise it would be possible for workers to fall outside the requirements by not actually picking a specific fund.
If you are using a trust-based scheme (a pension scheme or a master trust scheme) the trustees of the scheme have fiduciary duties to make sure that the investment options, including the default option, are appropriate.
However, contract schemes, like GPPs, do not have trustees. Instead, there is a contract between the provider and the employer that sets out the basic terms on which the scheme will be offered to employees, and potentially an administration agreement setting out service levels and member charges. The main agreement is a contract between the provider and the employee under which the investment risks lie almost entirely with the employee.
There are two points to watch out for here. In a recent report, the OFT has stated that some small pension schemes do not have cost-efficient default funds for their members. This can be due to the trustees either not having enough muscle to negotiate with their investment providers or not having sufficient expertise or interest in the scheme to keep the costs of the fund under review. The Regulator has been asked by the OFT to investigate this further and the OFT is pushing at an open door as the Regulator's guidance on "good quality" pension schemes has shown a clear bias against smaller occupational schemes which lack the scale to get a good deal for their members.
The second point is that under a GPP there is no one with any responsibility to keep the default fund to be provided under review. The Regulator has indicated that it believes that this gap in governance is best covered by the employer setting up some form of annual review committee to make sure that the scheme being provided and the associated charges (and in particular the default fund) are appropriate for its employees.
Best practice for such schemes until such date as the Regulator or another regulatory body sets out minimum standards of governance would be for the employer to set up a committee to meet at least annually to benchmark the default fund against similar funds elsewhere in terms of performance and management fees. L&G has recently agreed to cap its management fees for default funds to 0.5 per cent. Longer term the OFT has agreed with insurance providers that they should set up independent, but internal, committees to keep an eye on scheme fees. The Regulator is expected to release a report on this area of governance in November 2013.
- Are your HR processes able to link to your provider, or identify staff who need to be auto-enrolled by pay period?
Having managed to obtain a provider for your AE solution you may think your problems are over. Unfortunately, this is not the case, particularly if you have opted for NEST, or another provider that does not offer a middleware solution as part of its package of services.
As well as the need to identify who to auto-enrol at your staging date, you will need to review your workforce on an ongoing basis to make sure you do not miss an AE trigger. In short (and subject to the option to postpone assessment), any time a worker earns the equivalent of the annual AE trigger figure in any given pay period, you will need to auto-enrol him/her into a qualifying pension scheme, subject to a one-year gap where the worker has opted out of AE previously.
Maintaining a monitoring system for your staff capable of doing this can be difficult. One example of the problems it creates is that AE is based on pay periods. However, most HR departments do their calculations based on tax periods. Whilst the DWP is looking to introduce an easement in this respect, currently there can be mismatches between what AE requires in terms of information processing and what standard HR software can provide.
Some providers are able to offer bespoke software to allow employers to assess AE entitlement and set up triggers to provide the necessary information and trigger the relevant actions. The contracts associated with such software can be very onesided in terms of indemnity support and can often include clauses that state that the provider is not holding out that the software will be available at all times. Although this is understandable, you need to be clear on what is, and what is not, an acceptable level of outage for the system as your obligations are not mitigated if your software breaks down.
Further the exit terms on such licences can be harsh, requiring notice within a short annual timeframe to exit the contract in all but the most extreme circumstances.
There will also be added licensing costs and this should be factored into the costs associated with AE.
Another alternative is to obtain a middleware solution. These sit between payroll and the pension provider and assess AE entitlements, effectively translating the information from payroll into the necessary sets for AE. Notably these can still require certain inputs from payroll which may not normally be collected, and so again there is an element of "try before you buy" here.
For employers that use paperbased payroll systems AE may prove difficult and require a bit more planning to implement.
- Does it all fit together on day 1 and work for days 1 to whenever?
One of the biggest problems with a large project implementing AE is that, even though you have every individual piece of the jigsaw ready, when you go live with your solution you find out that some of the pieces do not fit together.
This can be disastrous for AE as the time it can take to replace a malfunctioning element of your implementation could be substantial, be subject to exit requirements set out under contract, and potentially result in the Regulator taking a personal interest in your business.
There are two main ways around this. First, have everything in place in good time before your implementation date: preparation is the key. Do not rely on the postponement option to give you time for your systems to bed in as your staff need to be able to opt into a qualifying scheme even during the three-month postponement period so you're not actually getting any more time to implement by using it. Second, once everything is in place run the system a few times with your provider, make sure they are getting all the information they need and that the information triggers the right communications going out to members.
Of course even the best implemented plan is likely to have a few teething glitches but, the more these can be reduced, the more likely you are to have a working AE system on your staging date, and the more likely it is that in the event that something does go wrong you will be able to show the Regulator that you've done everything in your power to comply with your statutory duties.